Q4 2019 Earnings Call
Assuming all participants are any listen only mode.
The speaker presentation. There will be question answer session to my Big question. During this session Evone depressed star one on your telephone. Please be advised today's conference is being recorded I wouldn't like Dan to conference over to it can't <unk> Vice President of Investor Relations. Please go ahead. Thank you Regina and good morning, everyone.
At this time I would like to welcome you to Cinemark holding Inc. fourth quarter and full year 2019 earnings release conference call hosted by marks the Roddy Chief Executive Officer, and Sean Gamble, Chief Financial Officer, and Chief operating Officer.
In accordance with the Safe Harbor provisions at 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.
Statements are subject to risks uncertainties and other factors that may costing them or actual performance to be materially different from that performance indicated or implied by such statements such factors are set forth in the company's <unk> SEC filings.
The company undertakes no obligation to publicly update or revise any forward looking statements todays call and webcast may include non-GAAP financial measures. A reconciliation of these non-GAAP measures did most directly comparable GAAP financial measures can be found in today's press release, but then the company's annual filing on form 10-K and on the company's website investors Dot Cinemark dotcom.
I'd now like to turn the call over to Mark the right.
Thank you Chad and good morning, everyone.
We appreciate you joining us to discuss our 2019 fourth quarter and full year results I.
I will primarily focus on full year highlights and Sean will address our quarterly financials in his prepared remarks.
We're pleased to report our fifth consecutive year of record revenues, which grew approximately 2% in 2019 to reached $3.3 billion worldwide.
During the course of the here, we continue to effectively drive our strategic initiatives to expand our domestic market share and capitalize on a slate of solid film content to achieve this all time high results.
I'd like to commend our global team for their ongoing focus and execution to deliver this truly remarkable trend.
As for the North America industry box office 2019 produced the second highest grossing box office of all time.
Following 2018 cents cents sensational record setting result.
Well many in the industry myself included believed the 2019 had the potential to deliver another record year.
We find it we find it hard to be two disappointed with $11.4 billion a box office.
Well well down approximately 4% versus 2018, that's coming off the heels of last year sizeable 7% growth.
And it's also worth noting that well 2019 felt shy of setting a new record. The industry has delivered three record results in the past five years.
With that backdrop cinemark domestic operation against surpassed North Americas full year industry box office performance by an impressive 200 basis points and for reference were compared against sizeable industry outperformance of 80, 90, 102 hundred basis points for the previous.
For years.
Moreover, we have now exceeded the industry for can have the past 11 years.
We attribute much of this long term success to our sustained focus on attracting and building attendance to maximize box office, while pursuing opportunities to capture incremental ancillary revenue.
To achieve this objective we're pursuing a wide range of initiatives that are aligned with the following strategies. One provides an extra ordinary guest experience to strengthen overall guest engagement and three push pursue organic and synergistic growth opportunities, while enhancing our core circuit.
And we will pursue these strategies, while maintaining the financial strength and flexibility of our balance sheet and cash position.
So let's dive a little deeper into what we have planned for each of these strategies in 2020, starting with our guest experience.
We believe our top notch customer service along with the sustained investment we have made to maintain our theaters as well as expanded premium amenities such as luxury loungers XD premium large format auditoriums and enhanced food and beverage offerings are meaningful differentiators for cinemark.
Luxury lounger recliner seats remain highly sought after preference of our customers and continue to generate lucrative returns in excess of our 20% threshold.
In 2019, we added another 200 auditoriums to our luxury lounger footprint, which brought our U.S. total recliner screen count to 2765 or 60% of our entire domestic circuit.
Based on the current pipeline of opportunities in 2020, we anticipate reclining an additional 200 auditoriums, which will further extend recliners to approximately 65% of our domestic footprint and continue to secure set of Mark's leadership position with the highest penetration of recliners among the major players.
Yes.
Luxury loungers have also been implemented and nearly 80% of our domestic premium large format, XD auditoriums, which take the ultimate immersive viewing experience that our ex these create to the next level.
Consumer preference for ex the heightened heightened sound and technology, along with his gigantic wall to wall screens is evident in 2019 global record of $165 million in admission revenue that we generated on our XD screens.
This represents more than 9% of the world of our worldwide box office on approximately 4% of our global screens.
Notably our XD premium theater amenity remains the number one exhibitor branded large format in the world with 275 XD screens throughout the U.S. and Latin America.
During 2020 will continue to capitalize on the strength of XD as we introduce XD screens in the majority of our new build add second XD screens and select locations and continue to pursue marketing campaigns to heighten brand recognition and awareness.
Expanding upon our commitment to the guest experience through theater technology, We recently announced a 10 year worldwide exclusive agreement with Citi Ondeck to install Barco series for RGB laser projectors, which will further elevate the movie going experience for our global audiences through.
Improved light uniformity larger color gamut sharper focus and enhance contrast ratios.
Another benefit of laser technology beyond the guest experience is that our overall operating expense will decline with the rollout, including reduced warranty maintenance labor electricity and parts as the new Labour technology is phased in throughout our worldwide circuit.
Well that well there will will be capital expenditures associated with this laser technology, we had factored that into our previous commentary regarding our expectations for capex going forward, we will strategically deployed laser projectors over the course of the next 10 years, which allows us to extend the life of our existing.
Digital projectors, as we methodically execute our projector conversion plan.
Another amenity that further enhances our guest overall experience at Centermark is expanded food and beverage offering guest feedback on the convenience of enjoying high quality food options and partaking in a nice glass of wine or craft beer, while watching a movie has been phenomenal and become an integral component of our evolving.
Movie going experience over the past several years. Furthermore, it continues to provide meaningful revenue and margin growth that is as is it as is apparent in our 13th consecutive year of food and beverage per cap growth, which reached another high a $5.31 in 2019.
Over the course of 2020, well continue to test and rollout new food and beverage concepts further extend successful programs like pizza hut and alcohol actively pursue growth in our core popcorn candy and fountain drinks categories utilize broad and personalized promotional opportunities to drive.
Incremental incident and continue to explore new and more efficient throughput strategies to reduce wait times, we look forward to sharing these outcomes and results with you as soon as the initiatives progress.
Supplementing our focus on providing guess an extra ordinary movie going experience is it is an emphasis on strengthening our overall engagement with Centermark. These initiatives include a wide range of marketing programs data analytic efforts and communication strategies that are aimed at increasing awareness attract.
In broader audiences and providing personalized experiences that enrich each of our guests unique interaction with centermark.
Our movie clubs subscription and movie fan loyalty programs have been Paramount to this engagement initiatives movie club continues to deliver strong consistent results. We added an incremental 100000 net members since our last earnings call and now have in excess of 950000.
Active members, providing us consistent cash flow from their monthly memberships, notably those 950000 members translate to an average at more than 2700 members per theater and solidifies movie club as the number one subscription program in the U.S. on a per location.
Basis.
Well, we clubs is designed to provide a tremendous value to a wide range of movie going population.
I'm highly frequent individual movie goers to families who only go to the theater a handful of times per year and as such we continue to see our membership our membership base grow on a consistent healthy trajectory.
Program benefits that include rollover movie credits, a 20% concession discount waved online fees the ability to share with family and friends all with no sign of commitments make movie club. The most consumer friendly program available. Our members continue to validate this point with sustained membership.
Hip satisfaction rates that exceed 90%. Furthermore, we continue to experience high levels of engagement and just two years. Since we launched movie club. We have sold approximately 38 million tickets through the program and more than 80% of those movie credits that had been issued have been redeemed.
As we continue to attract more guests into movie club and better understand and engage with our members. We're achieving our program goals of enhancing the guest experience increasing movie going frequency and driving more loyalty to centermark. Our newest members much like our early adopters visit our theaters three times more.
Often than the traditional movie goer and over the course of 2019 movie club purchases accounted for 14% of our domestic box office, which grew to 17% in the fourth quarter.
Along these same lines, we continue to see positive engagement trends through the improvements we've made to our free domestic movie fans loyalty program and various international programs throughout Latin America. In fact, we've seen an uptick of 65% and reward redemptions since launching movie fans with membership growth.
In excess of 10% since the end of the third quarter.
To date, we have over 12 million addressable consumers on a global basis, with whom we have direct ongoing relationships and communication the customer in for the customer information. These programs supply is powerful data as it provides us the ability to analyze and segment consumer preferences and behave.
For years.
Personalized communication on the individual level and customized offers and marketing messages and enrich the guest connectivity to Centermark. Furthermore, this information is highly valuable to our studio partners as we collectively aim to more effectively Taylor marketing campaigns to grow audiences and drive incremental visits.
To our theaters.
Much like the varied enhancements, we've made to our loyalty program similar recent advancements in our mobile App development website upgrade strategic partnerships and digital marketing capabilities have only further boost boasts boosted guest engagement and online ticket sales while much has been achieved over the past couple of years.
We still believe we have plenty of runway remaining as we continue to strategically focus our customer engagement journey in 2020 and beyond.
As we work to create an extra ordinary guest experience and strengthened engagement. We're also keenly focused on generating additional growth both organically and synergistically, while enhancing our core circuit and maintain the health of our financial position. This includes making strategic investments and advances in expanse.
One amenities maintenance and productivity to follow a prudent and disciplined approach over the course of 2020, we'll continue to actively pursue new builds and recliners that can confidently deliver our stringent ROI and EBITDA hurdles opportunistic and accretive M&A, where we can establish in Maine.
Staying a strong market position other ROI generating up opportunities such as food and beverage projection equipment as well as efficiency tools R&D into new potential growth channels like virtual reality gaming and dining concepts and sustained theater maintenance to preserve the health and quality.
<unk> of our existing circuit, which has been a meaningful competitive advantage over the years.
We'll also continue to aggressively pursue the continuous improvement program that we initiated in 2019 and discuss briefly during our last earnings call. A key goal of this program is to generate meaningful productive Bennett.
Through process simplification and improved operating efficiencies to.
To this end, we have targeted $40 million of opportunities to derive incremental margin improvement in our core operations that we expect to begin recognizing in 2020.
Now turning our attention specifically to Latin America for a moment after a couple of years of content related decline. We sell we saw a positive job in Latin America attendance into in 2019.
Was up almost 7% as a stronger crop of family and action oriented films resonated, particularly well across the region on the back of this content. Our full year revenue grew 20% on a constant currency basis. Our 2019 adjusted EBITDA was also up 16% in constant dollars.
And would have been up 23%, excluding the non operational drag of FC 842 lease accounting during the year.
Well operational results in Latin America rallied for the majority of 2019. Unfortunately, the final months of the year encountered a series of challenges that led to an abnormally low 11.9, adjusted EBITDA margin in fourth quarter.
In addition to the fourth quarters historically being the lowest attended quarter in the region due to holiday and seasonality driven content release patterns in the southern Hampus Hemisphere. This this quarter was further impacted by the non operational drag of lease accounting changes and the virtual print fees known as vps that are winding.
Down.
Underperformance of films relative to expectation along with softer box office generated by mid tier movies, and local titles and a crisis in Chile, including weeks of civil protests and riots that caused a prolonged closure of nearly all our theaters throughout the country.
Well some of these factors are one offs, it's worth noting that the non operational impact of lease accounting.
And VPF wind down will be ongoing as a result of these changes we expect the reported adjusted EBITDA margin for our international segment will most likely hover in the mid teens going forward with the potential to reach the high teens when attendance is strong.
And while our reported margins will be impacted by these factors I'd like to be clear that we're not compromising any international ROI or margin investment threshold, we remain prudent in our investment approach in Latin America targeting opportunistic and accretive growth.
We have not in the past nor will we in the future growth simply for gross sake as such the scale of our future International screen growth will remain contingent upon the political and economic environment as well as the intercut nature of each individual real estate development prospects.
And that's a nice segue into my next next topic of capital allocation.
As we think about capital allocation, we target a balanced and disciplined approach to maximize long term shareholder value with the following priorities one maintain our balance sheet strength to preserve flexibility and risk management to actively pursue strategic and financially accretive invest.
Cements to grow and secure the long term viability of cinemark, which I outlined during the strategic initiative discussions a moment ago and three distribute excess cash to shareholders.
With that I am pleased to announce our fifth consecutive increase to our dividend with a 6% increase or eight cents to one dollar and 44 cents per annum.
With this latest Bob Weve now grown our dividend by 33% over a five year period, which demonstrate our boards and managements ongoing confidence in the strength of centermark as well as the industry in which we operate.
In that vein, we remain very optimistic about the long term prospects for theatrical exhibition I mentioned in my opening remarks, but it's worth highlighting again in three of the past five years. The North America industry box office has reached new all time highs and that is in the midst of a significant expansion of.
In home streaming content.
We continue to believe that we predominantly compete for consumers time once they decide to leave their home and that streaming and theatrical movie going or in many ways complimentary to one another much like TV and theatrical movie goers have been for years. This notion was evidenced once again by the latest Ernst and young research.
Which showed a linear correlation between people streaming and movie going behavior people, who love movies simply enjoy and crave them at all formats.
Such cinemark will continue to focus on creating an elevated theatrical experience that cannot be replicated in home in doing so we'll be well positioned to continue to capitalize on the strength of content such as january's breakout hit bad voice for life. This past weekend big success of Sonic the Hedgehog and.
The myriad of diverse films still to come in 2020, including no time to die. The next in a long series of James Bond hits fast and furious nine Wonder woman 84 tenant from Chris Nolan Maverick the long awaited follow up to top gun. The return of those minions Disney's Jungle book.
One two films Tomorrow, and two from Pixar and Thats just to name a few.
And speaking further to the long term for spec long term prospects for theatrical exhibition. We're excited to already have a line of sight to a very strong range of product of 2021 releases, including Jurassic World three the next door Love and Thunder. The next mission impossible the Batman and.
New Indiana Jones fast and furious 10 and of course, the long anticipated next installment of avatar.
In closing as I reflect in our business, we remain very optimistic about the stability and long term viability of our industry I have lived and worked in this industry for 35 years most of those years at Walt Disney Studios, helping to develop their video cable television.
DVD and theatrical motion picture businesses and the last five years at cinemark, helping to enhance the out of home movie going experience and deploying upgraded guest experiences.
This perspective affords me a long term view over the course of in home technology evolution.
The movie going consumer has remained the most important component in this mix and as demonstrated time and time again, a desire to experienced the magic and wonder of larger than life immersive cinematic experience that can only happened in the large darkened auditorium among fellow movie.
Wars enthralled in the on screen action.
Cinemark remains committed to providing that exceptional movie going experience, while planning and operating our company and the most prudent financially stable manner.
That concludes my prepared remarks, I'll now turn the call over to Sean to address a more detailed discussion of our fourth quarter financial performance Sean.
Thank you Mark good morning, everyone.
Before getting into the details our fourth quarter results I'd like to again remind you about the impact on our financial statements of accounting pronouncements assay six so six and Asea 42.
While we have fully lapped the implementation of assay six so six is revenue recognition changes assay 840, twos lease accounting transition continues to distort our 2019 year over year comparisons.
As mentioned in prior quarters assay, a 42 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.
Again assay, a 42 is purely in accounting presentation change and does not impact cash rent payments obligations to landlords or any other underlying business or operating fundamentals.
Additional information about these changes is available in the footnotes of our 10-Q's and 10-K as well as the 8-K, we filed on May seven 2019 in tandem with our first quarters or first quarter earnings release.
Well the effects of assay, a 42 will be ongoing. This is the last quarter that will experience a year over year comparison differential as we fully lap implementation in the first quarter of 2020.
Shifting now to our fourth quarter results.
During the quarter, our global company generated total revenues of $788.8 million and consolidated adjusted EBITDA of $178.3 million.
Our adjusted EBITDA margin was 22.6%, which included a 70 basis point drag caused by the AMC 42, accounting changes as well as a 190 basis point lift from the incremental DC IP distributions that we outlined on our third quarter earnings call.
In the U.S. admissions revenues declined 1.3% to $364.9 million.
While down slightly compared to last year. This result exceeded north American industry performance by 70 basis points, which is on top of last year's outperformance of 290 basis points. When we set a new fourth quarter high.
Attendance of 43.3 million patrons declined 6.7% a sizable results from this quarter's top films couldn't fully match the combined strength of last year's mid tier titles.
Conversely, our average ticket price of $8.43 grew 5.8%, primarily driven by strategic price increases that benefited from opportunities created by recliner conversions.
Domestic concessions per patron achieved an all time record a $5 in 35 cents, an increased 7.4% versus Fourq you 18.
Mike Wise, we generated new fourth quarter record for concessions revenues of $231.5 million. Despite this quarter's decline in attendance.
Concessions growth was driven by increased sales of traditional concession products continued expansion and diversification of new offerings and selective strategic pricing actions.
Domestic other revenues increased 6.3% to $53.7 million, driven primarily by promotional and transactional related income.
Overall, our U.S. operations generated total revenues of $650.1 million adjusted EBITDA of $161.8 million and an adjusted EBITDA margin of 24.9%.
[noise] internationally as Mark previously described on top of what is typically the lowest attended quarter of the year. The fourth quarter faced a series of additional challenges, which included softness in volume and performance of mid tier films in local content, which adversely impacted attendance and our film rental rate okay.
Medical uproar in Chile that negatively affected movie going for weeks in that country.
Adverse expenditure timing associated with a series of Newbuilds that opened in December.
And the non operational drags of assay 42 lease accounting and virtual print fees winding down.
Collectively these factors put significant pressure on our fourth quarter International results. Despite positive overall results for the full year.
During the quarter international attendance declined 2.4% to 20.5 million patrons.
International admissions revenues were $69.3 million, which declined 8.1% versus last year as reported but were up 2.9% in constant currency.
Our as reported average ticket price of $3.38 translated to a constant currency increase of 5.6%, which was predominately driven by inflationary price growth and partially offset by reduced threed mix.
International concessions revenues were $43.5 million, which declined 6.5% as reported but increased 3.2% in constant currency.
Our as reported international concessions per patron was $2.12, which translated to a 5.9% increase in constant currency.
International other revenues were $25.9 million, which increased 2% as reported and 16.1% in constant currency.
This increase was largely driven by growth in screen advertising promotional activity and transactional related income.
Overall total international revenues were $138.7 million as reported with adjusted EBITDA of $16.5 million.
Our adjusted EBITDA margin was 11.9% and was adversely impacted by the factors previously described including the non operational transition to assay, a 42 lease accounting that lowered the rate by 160 basis points.
Foreign currency pressures remained heightened during the fourth quarter, delivering an approximate 11% translation headwind, which led to an approximate 18% unfavorable impact for the full year.
Looking forward if current rates continue to hold we would expect a percentage drag from currency devaluation in the low teens for 2020, but the first half of the year experiencing the most significant impact.
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 predominantly translation based and not transaction oriented.
Shifting back to our worldwide consolidated results fourth quarter film rental in advertising costs as a percentage of admissions revenues increased 190 basis points to 56.2%.
This increase was driven by higher concentration of blockbuster films increased promotional expenses during the quarter and reduced offset from international virtual print fees that are winding down as costs associated with our Latin American digital projector conversion fully recoup.
Concessions costs as a percentage of total concessions revenues increased by 120 basis points in comparison to the prior year.
This increase was driven primarily by the impact of expanded food and beverage offerings as well as merchandise sales that helped drive concessions revenue and per patron growth, but created an adverse mix effect on our global Cogs rate.
Salaries and wages were 12.9% of total revenues increased 60 basis points compared to the fourth quarter of 2018.
This increase was driven by reduced leverage over our base level of fixed labor that resulted from this quarter's decline in attendance as well as escalation of minimum wage rates in additional labor to support our varied concessions growth initiatives.
Facility lease expenses as a percentage of total revenues increased 70 basis points, primarily due to new theaters as well as a 5.4 million dollar year over year presentation increase associated with the adoption of assay 42.
Similarly utilities and other costs as a percentage of total revenues increased 110 basis points driven by reduced leverage over fixed costs as well as increased credit card fees property taxes in volume related revenue share payments to flicks affiliates and third party ticket and gift card sellers.
And Gionee for the fourth quarter increased 70 basis points as a percentage of total revenues.
Our DNA metric was also impacted by reduced leverage over fixed costs. In addition to incremental investments in personnel consulting and cloud software to support our various strategic growth and productivity initiatives as well as variances from year over year fluctuations in incentive compensation accruals.
Collectively fourth quarter pretax income was $42.6 million.
Net income attributable to Cinemark holdings, Inc. was $26.3 million or 22 cents per diluted share.
Two additional anomalies that adversely impacted this quarters net income where an incremental charge of $9.6 million associated with our NCM interest expense and a higher than normal effective tax rate of 37%.
Our NCM interest expense included a catch up entry in the fourth quarter associated with adjusting in assumption in the calculation of the significant financing component related to NCM exhibitor services agreement.
Further information about this topic is available in our 10-K.
Our elevated fourth quarter effective tax rate was impacted by two noncash items that had distorting effects on our international tax accounting.
On a full year basis, our effective tax rate was 29.2% and we continue to expect our annual global rate will be somewhere in the mid to high 20% range, excluding any future discrete tax items or visions to global tax loss.
With respect to our balance sheet, we ended the quarter with a cash balance of $488.3 million and a net debt position of one and a half billion dollars.
Shifting attention to our US footprint, we operated 345 theaters in 4645 screens in 42 states in 105 Dms at quarter end.
During the quarter, we opened two theaters and 24 screens and closed one theater with nine screens.
We have signed commitments to open seven new theaters and 84 screens during 2020 and 16 years, representing 70 screens subsequent to 2020.
We expect to spend approximately $108 million of Capex on these 154 domestic screens.
Internationally, we operated 209 theaters in 1487 screens in 15 countries across Latin America.
During the quarter, we opened five theaters and 35 screens.
We have signed commitments to opened six new theaters and 66 screens during 2020 and four theaters in 23 screens subsequent to 2020.
We anticipate spending approximately $42 million in Capex on these 89 international screens.
For the full year, we grew our global circuit by 13 theaters and 127 screens for a cumulative total of 554 theaters in 6132 screens.
Looking ahead, we will continue to target strategic and accretive newbuilds and acquisitions that meet the stringent investment approach that Mark previously described.
Okay.
With regard to overall Capex, we spent $117.1 million in the fourth quarter, including $32.9 million on Newbuilds and $84.2 million on existing theaters.
For the full year Capex was $303.6 million, which came in at the low end of the 300 to 325 million dollar guidance, we provided throughout the year as several new build projects originally slated for 2019 shifted into 2020 due to construction timing.
As we've evaluated our future pipeline of investment opportunities. We expect 2020 Capex will hold roughly in line with 2019 at around $300 million as a result of the project shifts just mentioned.
As well as our ongoing execution of the strategic initiatives Mark outlined earlier.
Of this spend approximately one third is designated for Newbuilds, both domestically and internationally. Another third is for core maintenance, which includes expenditures associated with the laser projection program that Mark discussed and the remaining third is for cash flow generating projects that include additional luxury lounger theater conversions and varied food and beverage initiatives.
Yes.
We continue to believe that investing in long term growth and stability through ROI generating initiatives that enrich our guest experience drive consumer engagement and improved productivity is a prudent use of capital.
In closing active investments that are being made not only by our company, but across the exhibition industry at large are serving to enhance and further invigorate the theatrical movie going experience.
We believe that these investments coupled with the sustained pipeline of strong film content should provide optimism about the long term outlook for both cinemark and the broader exhibition in general.
At Santa Mark We will remain we'll maintain our balanced and disciplined approach as we continued to build our business pursue fuel future growth opportunities and strive to further extend our consistent track record of financial health and results.
Virgina 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 one on your telephone keypad again that is star one. Our first question comes from the line of CAD Biden with Macquarie.
Good morning, Thanks for taking my question.
First I wanted to unpack Mark your comments on the international margin expectation, a little bit more you called out Chile in the quarter, which is about 10% of of the circuit.
Looking into 2020 can you kind of elaborate a little bit more in terms of if you're expecting to see margin pressure across each of the countries that you operate in lat am or was this mainly you kind of a july or Brazil issue. Thank you.
Thank you Chad.
I think it was because two things one there was there was obviously the onetime effect that we had in Chile, and just put a little more.
Color on that we had nearly all of our theaters closed for two weeks and then a lingering effect throughout the month.
And during that time of course, we were we were paying salaries and and rent and other things and effectively getting no income. So it did have a material effect on the quarter.
And then also we pointed out that there are some ongoing things like the effective VPF vps declining and the accounting rules that we talked about so there are some some ongoing issues and I think I think what what I said is.
Is that we expect similar in the mid teens for a go forward Latin America margin.
In the better years with good product, we can get that up into the high teens, but I think thats, what you should be looking and planning for as you go forward.
Just to add to that.
The.
The impact of lease accounting, which we expect will be ongoing close to 150 basis point drag that's going to continue and as mark touched on virtual print fees winding down we derived about $10 million of margin from that in 2019 that we think thats going to drop to close to 3000 3 million excuse me.
10 million in 19, and 3 million in 2020. So that also is going to be just a future impact on margin rates, which is part of what gets to to the the few forward looking figure that Mark described.
Okay. Thank you that makes sense.
And then I wanted to shift to.
The XD because I feel like you you'd have an extremely successful there you talked about rolling out a number of kind of second XD screens at theaters when you're doing this are you seeing.
Hey are you seeing the 20% returns that that you call for.
And then secondly are you cannibalizing your your own.
Non XD screens is it just driving higher ATP and CPP or could you could you kind of walk us through the economics of what you're seeing when you perform that thank you.
When we invest in an ex the Chad we are trying to get the Detroit or we're moving towards that 20% margin and thats, what our target is so so the answer to that is yes.
As it relates to.
As it relates to cannibalizing other attendance what happens as we take a screening that theater, we make it an ex D and what we look for is for incremental attendance into that theater.
With the Big high profile movies typically what sales out first is your XD auditoriums and when people are buying next either pain somewhere between two and a half and $3 upcharge. So to the extent that we're taking attendance moving it into XD has a very positive thing because we're getting to an incremental.
An incremental box office on it and.
So I mean, it's it's it is I would say, it's not necessarily incremental but what it is it is shifting from standard to a premium format and typically that's the format that sells out first.
Okay. Thank you very much less bullock. Thank you. Thanks.
Your next question comes from the line of Alexia Quadrani with JP Morgan.
Hi, Thank you very much it just two questions first following up on your comments on the domestic film rent expense in the quarter. It was up relative to Q4 17. The last Star Wars film came out which I think it better than the last July I guess is it the other factors.
That you highlighted or other films in the quarter. I think you mentioned that could have influenced or can we assume the split have gotten a little bit less favorable.
Then my follow up question is also an XT just given success, but that he and the marketing effort behind that would you ever consider licensing the brand to smaller circuits that lastly on premium format or just out these IMAX.
Thanks for the questions Alexia. This is Sean I'll take the first question Mark will take the second.
The film rental profile for the fourth quarter.
It was really just a derivative of the mix factor so.
The year over year I'll start there the last year fourth quarter and really the second half was driven heavily by a strong crop of mid tier titles that that led to a little bit more advantageous film rental and we just look at one stat that the amount of box office that was generated from films that grossed over 300 million.
Collars in the fourth quarter was 47% in the fourth quarter of 2019 compared to 7% fourth quarter 18. So as you know the films the larger they do they creep up on the the scale of film rental so that was the big factor year over year from that vantage point and that also kind of played into it.
Comparison against 2017.
Alexia relative to your question on.
Licensing equity to smaller exhibitors that don't have it we have done that on occasion, we've done it on into two specific occasions. We're open to it. The qualifier is we want to be absolutely certain that the quality level will that level that we're talking about so we're not we're not aggressively out marketing it but we have done it on occasion.
Thank you if I can squeeze in one more yeah I think it's only been a few months, but have you seen any impact from NTM New AD format in terms of how your your attendees are sort of reacting to it as it any thoughts on there.
It's Jay is generally not been a problem theres theres been a few comments, but but in the scheme of our they significant in terms of numbers. The answer is no im one of the things that we did to to try and mitigate that as well is we we took one less trailer pack that we're doing post show and we moved pre show.
So that Weve tried not to add too many minutes to the post Showtime time period, and I think thats been effective so there's been a few comments, but again not not to a material effect.
Thank you thanks a lot.
Your next question comes from the line of Megan Durkin with credit Suisse.
Hi, guys I wanted to ask a few force Sean on margins.
Given your comments around Fourq Eurnineteen film rentals I wanted to know if you could give us a little help with thinking about film rental expense. This year given the comp against the bigger films from Disney in 2019 any help you can drive would be helpful. And then can you give a little bit more color around the 40 million in margin opportunities Mark called.
For 2020, where would we see those flow through and when.
Sure thing Megan thanks for the questions.
Yes, ultimately on the film rental question film rental rate is going to it. It will obviously play out based on how the size and scale of films work out through the course of 2020, I would say going into the year based on what we're expecting a from there. We do think we'll see more of the.
Box office being driven by a range of content versus just.
Mega breakout blockbuster hits, so if that were to happen that would actually create a slight positive mix factor on film rentals, we should see that rate creep down a little bit in 2020 again, that's kind of based on an estimate it all play out to how things come through actually but we could see that shift if you look over the course.
Of the last five years or so our film rental rate really closer to almost 10 years. Our film rental rate have it hasn't kind of gone beyond a range of 200 basis points. We've been at the higher end recently, we think that will creep down somewhere within that band over 2020.
With respect to the the the margin.
Actions that we're pursuing that Mark described.
In terms of the different line items.
That's going to hit our a wide range of areas that the types of projects that we are focused on.
I really focused on streamlining labor practices, we're going to get some benefits derived from the laser projection transition that Mark mentioned theres, a whole slew of cost deflation actions were pursuing and varied other margin initiatives. Most are costs. There are few revenue actions there as well I would say the bulk of those would affect our.
Our gross margin a few of them would be gionee oriented.
Okay, great. Thanks.
Thanks, so much I can appreciate it.
Your next question comes from the line of Robert Fishman with Moffettnathanson.
Hi, good morning, guys.
One for Mark and one for Sean Mark I. Appreciate your prepared remarks on the balance sheet I'd like to ask if he can provide some more color around the board's recent discussion on capital returns in light of the dividend raise and I fully understand how the company's is the strength of its balance sheet as a key differentiator versus your peers, but I'm curious if theres any.
Desire at the board level to be slightly less conservative and consider share repurchase program, given where your stock is trading.
Hi, Thanks for the question, Robert we discuss all areas of.
Of capital allocation with the board and at this time the forward felt comfortable with an additional.
The increase in dividend, it's been very consistent now as you know five consecutive years.
There is always discussion about a stock repurchase, but we try not to to to make knee jerk reactions to that even if the stock is trading at is lower end and and we think that a stock repurchase program is only affected if it's very very meaningful in quantity and.
Over an extended period of time and.
In order for us to preserve the strength of our balance sheet. The strength of our cash position, we chose not to do that and to continue down the road of.
Consistent and stable.
Returns relative to our dividends and therefore, the fifth the fifth increase in a row. It is discussed it was discussed and we chose to go the dividend as opposed to stock buyback stock buyback.
Okay. Thank you Mark for Sean.
Can you share with us both the strategic and financial benefits of owning theaters in the U.S. and Latin America, and whether you'd ever consider spinning off for selling the Latam assets for the right price.
Sure.
Just.
Touching on the concept to spin off you know, it's not something we seriously consider today I mean, a while the region itself is somewhat depressed at the moment given some of the heightened levels of economic and political challenges and foreign currency into the just the macro global trade worries. We're we're still optimistic about the long term price.
Specs of Latin America.
Latin audiences, they still have a very strong appetite for movies and Theatergoing.
Region still pretty Underpenetrated with regard to overall screen count.
To your question on the benefits, we think we derive a range of benefits by the combined nature of our Latin American domestic operations, including sharing best practices, we derive some overhead synergies by having them together and obviously it gives us some geographical diversity so.
It's not something that we can necessarily considered like a spin off I'm not sure that would be the path to generate the most value for our long term shareholders if anything.
Sale would be probably more lucrative just to be clear, we're not suggesting that we're looking at selling our assets, but obviously as a public company.
If we receive an attractive offer something we'd have to look out like we did with Mexico several years ago.
Makes sense. Thank you Beth thanks, Robert Thanks Art.
Your next question comes from the line of David Miller with Imperial capital.
Hey, guys I have one for Mark and one for Sean Mark on your comments about XT. It would seem to me that what really works with XT and I've seen this in your Playa Vista.
Theater over here in Los Angeles.
Our the.
Event, driven films the tent Poles, the action films, the action adventure films, but not necessarily the romantic comedies from as you on your per Sean or perspective.
So with your comments about ex the expansion what was I would think I mean, correct me if I'm wrong part of that analysis was making sure that you had enough supply to justify the investment so looking out over the next three years do you think theres enough sort of action adventure tent Poles.
Really high octane franchise films to justify that investment I just want to hear your commentary there and then Sean.
By my calculations admissions to concessions conversion ratio was 63.3% that's I think a record for the fourth quarter. Just fantastic number was that due primarily to just price hikes on existing concessions or did you introduce a new food food concepts in the quarter. Thanks very much.
David Thanks, very much for all ill take the XD question.
Let me to say the reason, we're putting additional ex season is because there is demand for them I mean, they are there the number one thing that the studios in our distribution partners want every week and it's not just your big action adventure, Tom cruise and top gun and and Wonder woman. It's literally every week I'll give you a cup.
Well examples crazy Rich Asians, which I would call a romantic comedy did did gang busters in our XT.
Last summer Lion King was through the roof in XD first wants to be sold out and even as recently as last weekend.
We held our expertise and we put sadik into our expertise and again.
The first the first theaters to sell out or exceeds the reason, we're putting second once in some auditoriums is because of demand it's pure and simple. So we're responding to consumer demand and also studio demand to be in the premium theater. They love it because they're movies are number one scene in the absolute best form.
Possible with with the sound coming from all directions, and and wall to wall screens and secondarily. They like the increased box office. So it's a win win.
And on the concessions question, David It really was another quarter of just content that played very well to concession purchases and we were able to take advantage of that seems strong character.
Driven lineup, which played well to merchandise and some of the other tactics. We utilized so about two thirds of the per cap growth. We saw in the quarter was really associated with incidence driving initiatives, including the new categories and distribution techniques in general volume growth overall and the other.
Third was just from from pricing so it really was more.
Product sales more so than than price, which drove the concession benefits in the quarter.
Hey, Thank you thanks, David Thanks for questions.
Your next question comes from the line has been Swinburn with Morgan Stanley.
Thanks, Good morning.
Mark I, just wanted to hear little bit more on the deal you do a symbiotic I guess one question, we why do an exclusive deal what does that do for you guys.
And then secondly, just anymore color on kind of the timing of this deployment and how broad it's going to be and when we might see the some of the financial benefits that you highlighted.
And then secondly for for either review.
Do we need to be watching for virtual print fees roll off in the US circuit and there is some comments in the.
Okay about cost recruitment in late 2020 for DC IP I just wanted to make sure. We we were sort of paying attention to the right stuff on the vps in the U.S.
Okay been let me take the first one which is the question on symbiotic.
First I should say, obviously, we're under it and da with them, but let me let me speak to what I can can the reason for an exclusive deal from a strategic standpoint for us.
You have what I think probably recognized as the absolute best.
Team of people in our theater technology and they did an extensive research I mean extensive every potential.
Provider of.
New laser technology projectors for us brought Sean and I into it brought our film people into it we did test we opened them up I mean, a lot of work was done and it was our it was our analysis that they had the best overall technology and cost and long term cost of ownership.
And so we chose to do a deal with them, which was financially beneficial for us and allowed us all the various items we needed to be.
To be comfortable in doing a long term 10 year deal with them with with every kind of flexibility that we may or may not need.
And the plan that we laid out is over 10 years, we're very fortunate in that we have a very good.
Group of of Xeon bold projectors projectors, right now for K digital and we're going to methodically be able to rollout. These lasers over a 10 year period and in process as we put in new lasers and take out the xeon, we have an opportunity to take those projectors and use them for parts as.
We go forward to extend the life of our existing.
As the on bolt projectors. So it really is the best to both worlds for us and we made a commitment to the it too.
Two barco because we just felt like it was the best technology and the best overall financial deal for Ciena Mark.
Got it and then on the this is Sean I'll take the DCP on the DCP question.
See IP distributions are that hold deal and structure works, a little bit differently than our international Vps in a in Latin America, we actually.
Set up the whole financing arrangement for the digital projector conversion and the payments that have been made had been booked as an offset to film rental over the years.
Those are winding down to been more steady stream. The way DCIX. Obviously was set up that was set up as a third party entity.
There had been excess just cash distributions that had been made.
To the various parties in DC IP over the years for us that has been about $5 million to $6 million year now that DC IP is kind of coming to the end of its run the excess cash that's been built up is going to be fully distributed so.
Last year in 2019, we saw an increase of that begin where we get received about 24 million in distributions. This year. In 2020, we expect that is going to grow to about 35 million and then it will drop in 2022 about 5 million and that and then it will be zero thereafter, so those.
On to us in the form of distributions and booked as dividends.
Into our company so it doesnt affect that film rental line, but there will be a spike this year and then it will drop down in subsequent years.
Got it that's very helpful. Thank you yes.
Hi, Thanks and.
Your next question comes from the line of Jim Goss with Barrington Research.
Thanks, you outlined earlier.
The use of capital for an equal parts for Newbuilds maintenance and cash flow generating initiatives in terms of the appetite for Newbuilds I was wondering if you could talk about the circumstances in which you'd want to.
Undertake those like what synergies would you would be key and and other things like branding distribution competitive gap shopping center dynamics and advantages are starting from scratch are there other things there are really driving those decisions.
Jim.
I think I'll take that let me tell you, making new build decisions are.
But what Sean and I consider to probably be the most important decisions. We make every year because we're investing in the company's capital upfront and then we're committing the company many times to 15 years of of lease payments. If we don't build it and fee. So it's taken very very carefully we have a fan.
Past stick real estate team, who has the ability and wherewithal and thank goodness the capital to be able to go out and look for very opportunistic places.
Theaters. So we're doing a couple of things one we're trying to protect the markets that were in protect our flanks and as population grows. Perfect example of that is in 2019, we built two brand new theaters in the northern part of Dallas, because that's where the population growth is going so we built new theaters up there because.
Population is going there and we wet and then we're constantly looking for new areas that we can go into where either the theaters that are there are.
Our not up to par and give us an opportunity for there has been been growth in in new areas. So the Sacramento area, you know the Central Valley area of California, a whole bunch areas in Texas in Utah.
We built two new theaters in New Jersey last year. So it really is follow population trends is what we do and when we see an opportunity we have the unique ability right now to move very quickly and aggressively and get the theater built relative to shop your comment on shopping centers.
We've we've gone into a number of sites with old Sears locations, where they were really good malls. It was just they needed to refresh relative to the retailers that we're in there and we've we've gone ground up by tearing down old auto store centers and putting the theater in the parking lot of a very vibrant mall just need.
The new retailer, we have other places where we've gone inside structure. Some sales we have one of those going on in Roseville right now Great Mall, we're just going on and we're going into second floor and big sporting goods stores going on the bottom floor in Rosedale, California, Rightside outside of Sacramento. So.
We are we are actively and aggressively looking for new builds.
In the us because we think there are ongoing opportunities for it.
Okay, and I guess it takes the pressure off of finding acquisition targets to then well vote I.
I mean, I think I think I'm glad I'm actually glad you brought that up because because these are not mutually exclusive we are looking for acquisition partners acquisition targets as well.
Historically, we have been very disciplined in our approach and so we're only going to buy and put money down on on acquisitions, where it is accretive from day, one so to the extent that we can find those we can do that simultaneously with with building new theaters.
Okay and one other thing.
To the extent that Latin America is less up into the right as it was in some years past are there any markets outside of Latin America that have caught your eye as potential places to enter.
Jim We're always we're always looking but to this point no. We obviously kick the tires on everything that was taking place the middle East and decided not to enter that Fray we've looked in Asia and it looks like that's probably not where we're going to go and Europe seems pretty mature to us in less just that unless just a unique.
Opportunity came our way, but right now we're satisfied in going deeper in the United States in Latin America.
Alright, thanks very much.
Thanks, Jim.
Our final question will come from the line at island Gold with loop capital.
Thanks for taking my questions a couple of please.
Average ticket prices have been increasing and an increasing rate the past couple of quarters in the US wondering what's driving that is good news second impairments have increased the past couple of years is it getting to the point, where if consumers don't have a great theater. The they are not willing to go as often so.
Should we expect that to continue at this sort of rate that we've had this past year and third with respect to the acquisitions following up on Jim's question.
As part of the reason the company decided on not to be more aggressive would tell you buyback because you think maybe if it is a weaker are tougher year at the box office. This year as many have expected there might be some acquisition opportunities that pop up in the U.S. Thank you.
Thanks for the question zones. This is Sean I'll take the first two and Mark will take the last one.
On ATP really the the biggest driver that debt.
Two things one we looking at the beginning of this year. We we saw a beginning of 2019, we so what we believed to be a really strong film lineup and the way we continue to operate towards prices be a little bit more conservative in content years that maybe a little bit more questionable and go after catching up in.
Strong years, so we pursued a little bit more than maybe we would have in the past, but one of the other big benefits. We derive is all the recliner conversions. We've done we've continued to see opportunities with demand to increase our pricing. There also is a little bit of of beneficial mix incorporated in there, but really was the combination of being.
Touch more aggressive this in 2019 and that the lift from recliner is that that kind of drove our.
Our upticks in ticket pricing during the course of the year.
As far as impairments go yes, it's a good observation.
I would say the really the bulk of the growth over the last few years has been driven by.
A couple of projects that I would say were a bit more one off projects.
And required a couple of write offs I think last quarter. We described at least one of them, which was like a 21 high end 21 and over concept that just a struggle to gain some traction. So we tend to have a pretty conservative approach. When we look at impairments of the company and we take a look at a future cash flows.
Based on current level of performance so in down years that puts more strain on puts more strain on those theaters and we tend to take a conservative approach towards writing down. So we could see some more of that as we look forward in the future, but I would say at least hope is some of those bigger hits that we.
I had in recent years, we wouldn't see them to that scale going forward.
I would I would just had one one thing on this Alan as well.
We have also recently increased our price on movie club, we've done an east coast West Coast now central part of the country as well so in about 96% of the country would increase the price from 899 to 999, we left a small part of the country out just as we could have a can control group.
But thus far we've seen no negative effect on it.
Because what we found on moving clubs as the consumer really is purchasing movie club for a variety of the benefits some because of the concession benefit others because of the share ability in the rollover of it so the price increase the one dollar price increase some 899 to 999 has had almost no no.
It could affect relative to subscribers, especially since we added 100000 net subscriber since our last earnings call.
And we hadn't increase the price since we launched movie club in December of 2017, so that helped a little bit as well relative to your question on on.
Capital allocation.
Really wouldnt tie those those two things together.
It wasn't it wasn't a decision on the board to say, we want to have more we want to have more capital involved in case of acquisitions. It really comes down to the first thing that we look at is maintaining a strong balance sheet and then we look and say where can we deploy that internally whether that be with new theaters M&A or other.
Our investment opportunities and then finally, how can we returned the excess capital and we tend to be relatively conservative there nothing has changed there we don't anticipate that.
So a stock buyback would have caused us.
To have utilize capital that would otherwise wanted to to have available for other purposes, and we felt like we had better opportunities to do so so it really came down to that it wasn't a it wasn't an either or position.
Mark I have one quick follow up.
Sean said the goal is to be 65% of your domestic footprint being luxury loungers at the end of this year what percent do you think that ultimately gets too.
That's that's really difficult to say, we honestly, we take that on a on a year by year, even quarter by quarter basis because.
Theres always going to be some theaters, where you just want to hold onto the the seat count because you need it and there is such a demand for it so theres always going to be some of that but it's going to slowly creep up simply organically because every new theater that we built is of course recline usually to theaters that are coming off their lease and we're now.
Not renewing our unrequited so I'll put it this way, it's clearly going to get north of 70, but I'm not going to take it any further than that just because we reevaluated.
On a constant basis.
Okay. Thanks for the glass, taking the questions. Thanks I appreciate it.
I'll now turn the conference back over to management for any closing remarks.
We'd like to thank you all for joining US. This morning, we look forward to speaking to you all again.
With our first quarter call. Thank you very much.
By now.
Ladies and gentlemen, this concludes today's call. Thank you all for joining you may now disconnect.
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