Cinemark Holdings, Inc. (CNK) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen thank you for standing by and welcome to the Cinemark’s Fourth Quarter and Full Year 2019 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Chanda Brashears, 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 Holdings Inc.’s fourth quarter and full year 2019 earnings release conference call hosted by Mark Zoradi, Chief Executive Officer and Sean Gamble, Chief Financial Officer and Chief Operating Officer. In accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, certain matters that are discussed by members of management during this call may constitute forward-looking statements. Such statements are subject to risks, uncertainties and other factors that may cause Cinemark’s actual performance to be materially different from the performance indicated or implied by such statements. Such factors are set forth in the company’s SEC filings. The company undertakes no obligation to publicly update or revise any forward-looking statements. Today’s call and webcast may include non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures can be found in today’s press release within the company’s annual filing on Form 10-K and on the company’s website, investors.cinemark.com. I would now like to turn the call over to Mark Zoradi.

Thank you, Chanda and good morning everyone. We appreciate you joining us to discuss our 2019 fourth quarter and full year results. I will primarily focus on full year highlights and Sean will address our quarterly financials in his prepared remarks. We are pleased to report our fifth consecutive year of record revenues, which grew approximately 2% in 2019 to reach $3.3 billion worldwide. During the course of the year, we continue to effectively drive our strategic initiatives to expand our domestic market share and capitalize on the slate of solid film content to achieve this all-time high result. I would 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 sensational record-setting results. And while many in the industry myself included, believe that 2019 had the potential to deliver another record year. We find it hard to be too disappointed with $11.4 billion of box office, while down approximately 4% versus 2018. That’s coming off the heels of last year’s sizable 7% growth. And it’s also worth noting that while 2019 fell shy of setting the new record, the industry has delivered three record results in the past 5 years. With that backdrop, Cinemark’s domestic operation again surpassed North America’s full year industry box office performance by an impressive 200 basis points. And for reference, we are comparing against sizable industry outperformance of 80, 90, 100 and 200 basis points for the previous 4 years. Moreover, we have now exceeded the industry for 10 of 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 are pursuing a wide range of initiatives that are aligned with the following strategies: one, providing extraordinary guest experience; two, 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 remained a 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 2,765 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 Cinemark’s leadership position with the highest penetration of recliners among the major players. Luxury Loungers have also been implemented in nearly 80% of our domestic premium large-format XD auditoriums, which take the ultimate immersive viewing experience that our XDs create to the next level. Consumer preference for XD heightened sound and technology, along with this gigantic wall-to-wall screens, is evident in 2019’s global record of $165 million in admission revenue that we generated on our XD screens. This represents more than 9% 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, we will continue to capitalize on the strength of XD as we introduce XD screens in the majority of our new builds, add second XD screens in 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 Cinionic to install Barcode Series 4 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 enhanced contrast ratios. Another benefit of laser technology beyond the guest experience is that our overall operating expense will decline with the rollout, including reduced warranties, maintenance, labor, electricity and parts as the new labor technology is phased in throughout our worldwide circuit. While there will be capital expenditures associated with this laser technology, we have factored that into our previous commentary regarding our expectations for CapEx going forward. We will strategically deploy 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 plans. Another amenity that further enhances our guest overall experience at Cinemark 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 a 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 as is apparent in our 13th consecutive year of food and beverage per cap growth, which reached another high of $5.31 in 2019. Over the course of 2020, we will 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 drink 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 the initiatives progress. Supplementing our focus on providing guests and extraordinary movie-going experience is an emphasis on strengthening our overall engagement with Cinemark. These initiatives include a wide range of marketing programs, data analytic efforts and communication strategies that are aimed at increasing awareness, attracting broader audiences and providing personalized experiences that enrich each of our guests’ unique interaction with Cinemark. Our Movie Club subscription and Movie Fan loyalty programs have been paramount to this engagement initiative. Movie Club continues to deliver strong consistent results. We added an incremental 100,000 net members since our last earnings call and now have in excess of 950,000 active members providing us consistent cash flow from their monthly memberships. Notably, those 950,000 members translate to an average of more than 2,700 members per theater and solidifies Movie Club as the number one subscription program in the U.S. on a per location basis. Movie Club is designed to provide a tremendous value to a wide range of movie-going population from highly frequency 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 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 satisfaction rates that exceed 90%. Furthermore, we continue to experience high levels of engagement. In just 2 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 have been issued have been redeemed. As we continue to attract more guests into Movie Club and better understand and engage with our members, we are achieving our program goals of enhancing the guest experience, increasing movie-going frequency and driving more loyalty to Cinemark. Our newest members, much like our early adopters, visit our theaters 3 times more often than the traditional moviegoer. 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 have made to our free domestic Movie Fan loyalty program and various international programs throughout Latin America. In fact, we have seen an uptick of 65% in reward redemptions since launching Movie Fan 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 information these programs supply is powerful data as it provides us the ability to analyze and segment consumer preferences and behaviors, personalize communication on an individual level and customize offers and marketing messages and enrich the guest connectivity to Cinemark. Furthermore, this information is highly valuable to our studio partners as we collectively aim to more effectively tailor marketing campaigns to grow audiences and drive incremental visits to our theaters. Much like the varied enhancements we have made to our loyalty program, similar recent advancements in our mobile app development website upgrades, strategic partnerships and digital marketing capabilities have only 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 extraordinary guest experience and strengthen engagement, we are also keenly focused on generating additional growth both organically and synergistically, while enhancing our core circuit and maintaining the health of our financial position. This includes making strategic investments and advances in expansion, amenities, maintenance and productivity that follow a prudent and disciplined approach. Over the course of 2020, we will 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 and maintain a strong market position, other ROI generating 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 dine-in concepts and sustained theater maintenance to preserve the health and quality of our existing circuit which has been a meaningful competitive advantage over the years. We will 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 benefits through process simplification and improved operating efficiencies. 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 saw a positive jump in Latin America attendance in 2019, that 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 ASC 842 lease accounting during the year. While 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 quarter’s historically being the lowest attended quarter in the region due to holiday and seasonality driven content relief patterns in the Southern Hemisphere, this quarter was further impacted by the non-operational drag of lease accounting changes and the virtual print fees known as VPF that are winding down. Under-performance 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 the prolonged closer of nearly all our theater throughout the country. While some of these factors are one-off, it’s worth noting that the non-operational impact of lease accounting and VPF wind down will be ongoing. As 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 would like to be clear that we are not compromising any international ROI or margin investment thresholds. 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 grow simply for growth’s sake. As such, the scale of our future international screen growth will remain contingent upon the political and economic environment as well as the intricate nature of each individual real estate development prospect. And that’s a nice segue into my 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; two, actively pursue strategic and financially accretive investments 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 firth consecutive increase to our dividend, with a 6% increase or $0.08 to $1.44 per annum. With this latest bump, we have now grown our dividend by 33% over a 5-year period, which demonstrates our board’s and management’s ongoing confidence in the strength of Cinemark 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 3 of the past 5 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 consumer’s time once they decide to leave their home. And that streaming and theatrical movie-going are in many ways complementary to one another, much like TV and theatrical movie-goers have been for years. This notion was evidenced once again by the latest Ernst & Young Research, which showed a linear correlation between people’s streaming and movie-going behavior. People who love movies simply enjoy and crave them in all formats. As such, Cinemark will continue to focus on creating an elevated theatrical experience that cannot be replicated in home. In doing so, we will be well positioned to continue to capitalize on the strength of content such as January’s breakout hit Bad Boys for Life, this past weekend’s 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 & Furious 9, Wonder Woman 84, Tenet from Chris Nolan, Maverick, the long-awaited follow-up to Top Gun, the return of those minions, Disney’s Jungle Book and in addition, two films from Marvel and two from Pixar and that’s just to name a few. And speaking further to the long-term prospects for theatrical exhibition, we are excited to already have a line of sight to a very strong range of product of 2021 releases, including Jurassic World 3, the next Thor: Love and Thunder; the next Mission Impossible; the Batman; a new Indiana Jones; Fast & 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, 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 5 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 is demonstrated time and time again a desire to experience the magic and wonder of larger than life immersive cinematic experience, that can only happen in a large darkened auditorium among fellow moviegoers enthralled in the on-screen action. Cinemark remains committed to providing that exceptional movie-going experience, while planning and operating our company in the most prudent financially stable manner. That concludes my prepared remarks. I will 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 of our fourth quarter results, I would like to again remind you about the impact on our financial statements of accounting pronouncements ASC 606 and ASC 842. While we have fully lapped the implementation of ASC 606’s revenue recognition changes, ASC 842’s lease accounting transition continues to distort our 2019 year-over-year comparisons. As mentioned in prior quarters, ASC 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. Again, ASC 842 is purely an 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-Qs and 10-K as well as the 8-K we filed on May 7, 2019 in tandem with our first quarter earnings release. While the effects of ASC 842 will be ongoing, this is the last quarter that will experience a year-over-year comparison differential as we fully lap its 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 ASC 842 accounting changes as well as a 190 basis point lift from the incremental DCIP 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 years out-performance of 290 basis points when we set a new fourth quarter high. Attendance of 43.3 million patrons declined 6.7% as 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 of $5.35 and increased 7.4% versus 4Q ‘18. Likewise, 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%. 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 and local content, which adversely impacted attendance and our film rental rate, a political uproar in Chile that negatively affected movie-going for weeks in that country. Adverse expenditure timing associated with a series of new builds that opened in December and the non-operational drags of ASC 842 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 predominantly driven by inflationary price growth and partially offset by reduced 3D 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 ASC 842 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 the percentage drag from currency devaluation in the low-teens for 2020 with 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 and advertising cost 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 a reduced offset from international virtual print fees that are winding down as cost 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 and 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 and 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 year-over-year presentation increase associated with the adoption of ASC 842. Similarly, utilities and other cost as a percentage of total revenues increased 110 basis points driven by reduced leverage of our fixed costs as well as increased credit card fees, property taxes and volume-related revenue share payments to Flix affiliates and third-party ticket and gift card seller. And G&A for the fourth quarter increased 70 basis points as a percentage of total revenues. Our G&A metric was also impacted by reduced leverage over fixed costs. In addition to incremental investments in personnel, consulting and cloud software to support our varied strategic growth and productivity initiatives as well as variances from year-over-year fluctuations in incentive compensation accruals. Collectively, fourth quarter pre-tax income was $42.6 million. Net income attributable to Cinemark Holdings Inc. was $26.3 million or $0.22 per diluted share. Two additional anomalies that adversely impacted this quarter’s net income were 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 an assumption in the calculation of the significant financing component related to NCM’s 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 non-cash 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 revisions to global tax laws. With respect to our balance sheet, we ended the quarter with a cash balance of $488.3 million and a net debt position of $1.5 billion. Shifting attention to our U.S. footprint, we operated 345 theaters and 4,645 screens in 42 states and 105 DMAs at quarter end. During the quarter, we opened 2 theaters and 24 screens and closed 1 theater with 9 screens. We have signed commitments to open 7 new theaters and 84 screens during 2020 and 6 theaters 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 and 1,487 screens in 15 countries across Latin America. During the quarter, we opened 5 theaters and 35 screens. We have signed commitments to open 6 new theaters and 66 screens during 2020 and 4 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 and 6,132 screens. Looking ahead, we will continue to target strategic and accretive new builds and acquisitions that meet the stringent investment approach that Mark previously described. With regard to overall CapEx, we spent $117.1 million in the fourth quarter, including $32.9 million on new builds 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 million to $325 million guidance we provided throughout the year as several new build projects originally slated for 2019 shifted into 2020 due to construction timing. As we have 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 from new builds both domestically and internationally, another third is for core maintenance, which include 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. 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 improve 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 a sustained pipeline of strong film content should provide optimism that the long-term outlook for both Cinemark and the broader exhibition in general. At Cinemark, we will maintain our balanced and disciplined approach as we continue to build our business, pursue future growth opportunities and strive to further extend our consistent track record of financial health and results. Regina, that concludes our prepared remarks. And we would now like to open up the lines for questions.

[Operator Instructions] Our first question comes from the line of Chad Beynon 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 this circuit, but looking into 2020, can you kind of elaborate a little bit more in terms of if you are expecting to see margin pressure across each of the countries that you operate in LatAm or was this mainly kind of a Chile or Brazil issue? Thank you.

Thank you, Chad. I think it was two things. One, there was obviously a one-time effect that we had in Chile. And just put a little more color on that, we had nearly all of our theaters closed for 2 weeks and then a lingering effect throughout the month. And during that time of course, we were paying salaries 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 effect of VPFs declining, the accounting rules that we talked about. So there are some ongoing issues. And I think what I said is that we expect somewhere in the mid-teens for a go forward Latin America margin in the better years with a good product we can get that up into the high-teens, but I think that’s what you should be looking and planning for as you go forward.

And Chad just to add to that, 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 that’s going to drop to close to $3 million – excuse me, $10 million – $3 million in 2020. So that also is going to be just a future impact of margin rates, which is part of what gets to the few forward-looking figure that Mark described.

Okay, thank you. That makes sense. And then I wanted to shift to XD, because I feel like you have been extremely successful there you talked about rolling out a number of kind of second XD screens at theaters, when you are doing this, are you seeing a) are you seeing the 20% returns that you called for? And then secondly, are you cannibalizing your own non-XD screens? Is it just driving higher ATP and CPP or could you kind of walk us through the economics of what you are seeing when you perform that? Thank you.

When we invest in an XD, Chad, we are trying to get to toil – we are moving towards that 20% margin and that’s what our target is. So the answer to that is yes. As it relates to cannibalizing other attendance what happens is we take a screen in that theatre we make it an XD and what we look for is for incremental attendance into that theatre with the big high profile movies typically what sells out first is your XD auditorium and when people are buying XD they are paying somewhere between $2.5 and $3 up charge so to the extend that we are taking attendance XD is a very positive thing because we are getting an incremental box office on it and so I mean it is I would say it is not necessarily incremental but what it is shifting from standard to a premium format and typically that’s the format that sells out first okay.

Okay, thank you very much. Best of luck.

Thank you. Thanks, Chad.

Your next question comes from the line of Alexia Quadrani with JPMorgan.

Thank you very much. It is just two questions. First following up on your comments on the domestic film rents expense in the quarter, it was up relative to Q4 ‘17 when the last Star Wars film came out which I think is better than the last Jedi? I guess, is it the other factors that you highlighted or other films in the quarter I think you mentioned that could have influenced it or can we assume this splits have got in the little bit less favorable and then my third question is also on XD just given success with XD and the marketing effect behind it would you ever consider licensing the brand to smaller circuits that lack the on-premium format or just don’t use IMAX?

Thanks for the questions, Alexia, this is Sean. I will take the first question. Mark will take the second. Yes, the film rental profile for the fourth quarter that was really just a derivative of the mix factor. So year-over-year I will start there, the last year fourth quarter really second half was driven heavily by a strong crop of mid-tier titles that led to a little bit more advantageous film rental and we just look at one stack that the amount of box office that was generated from films that grossed over $300 million in the fourth quarter was 47% in the fourth quarter of 2019 compared to 7% in fourth quarter 18 so the hot films the larger they do they creep up on the scale of film rentals so that was the big factor year over year from that advantage point and that also contemplate into a comparison against 2017.

Alexia, relative to your question on licensing XD to smaller exhibitors who don’t have it we have done that on occasion we have done it on two specific occasions we are open to it the qualifier is we want to be absolutely certain that the quality level that we are talking about so we are not aggressively out marketing it but we have done it on occasion.

Thank you. And if I can squeeze in one more I think it is little bit few months but have you seen any impact on MTM’s new add format and in terms of how your attendees are sort of reacting to it is it any influence on there?

It is generally not being a problem there has been a few comments but in the scheme of are they significant in terms of numbers the answer is no one other things that we did to try and mitigate that as well is we took one less trailer pack that we were doing post show and we moved to pre show so that we have tried not to add to many minutes to the post show time period and I think that’s been effective so there has been a few comments but again not to a material effect.

Thank you.

Thanks a lot, Alexia.

Your next question comes from the line of Meghan Durkin with Credit Suisse.

Hi, guys. I wanted to ask a few for Sean on margins given your comments around 4Q ‘19 film rentals, I wanted to know if you can give us a little help with thinking about film rental expenses here given the comp against the bigger films from Disney in 2019 any help you can provide would be helpful and then can you give a little bit more color around the $40 million in margin opportunities Mark called out for 2020, where would we see those go through and when?

Sure. Thanks Meghan. Thanks for the questions. Ultimately on the film rental question, film rental rate is going to – 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 are expecting from the year we do think we will see more of the box office being driven by a range of content versus just Mega breakout blockbuster hits so if that would have 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 close to almost ten years our film rental rate has not kind of gone beyond a range of 200 basis points it would have been at the higher end recently we think that will creep down somewhere within that band over 2020 with respect to the margin actions that we are pursuing that Mark described in terms of the different line items that is going to hit our wide range of areas the types of projects that we are focused on are really focused on streamlining labor practices we are going to get some benefits drive from the laser projection transition that mark mentioned there is a whole slew cost deflation actions we are pursuing in varied other margin initiatives most of cost are few revenue actions there as well I would say the bulk of those would affect our gross margin few of them would be G&A oriented.

Okay great. Thanks.

Thank you so much Meghan. I appreciate it.

Your next question comes from the line of Robert Fishman with MoffettNathanson.

Hi, good morning guys. I have one from Mark and one for Sean. Mark, I appreciate your prepared remarks on the balance sheet I would like to ask if you can provide some more color around the boards recent discussion on capital occurrence in light of the dividend rates and I fully understand how the company sees the strength of its balance sheet as a key differentiator versus your peers but I am curious if there is any desire at the board level to be slightly less conservative and consider share repurchase program given where your stock is trading?

Thanks for the question, Robert. We discussed all areas of capital allocation with the board and at this time the board is dealt comfortable with an additional increase in dividend it is been very consistent now as you know five consecutive years there is always discussion about the stock repurchase but we tried not to make knee jerk reactions to that even if the stock is trading at its lower end and we think that a stock repurchase program is only effective if it is 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 dividend and therefore the fifth increase in a row it is discussed it was discussed and we choose to go to dividend root as opposed to stock buyback.

Okay, thank you Mark and 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 would ever consider spinning of or selling the LatAm assets for the right price?

Sure. Just touching on the concept of spin-off it is not something we seriously consider today I mean while the region itself is somewhat depressed at the moment given some of the height levels of economic and political challenges and foreign currency and some just the macro global trade worries at work we are still optimistic about the long term prospects of Latin America LatAm audiences they still have a very strong appetite for movies and theater going the region still pretty under-penetrated 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 over head synergies by having them together and obviously gives us some geographical diversity so it is not something that we can necessarily consider like a spin off I am 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 are not suggesting that we are looking at selling our assets but obviously it is a public company if we would receive an attractive offer would be something we have to lookout like we did with Mexico several years ago.

Make sense. Thank you both.

Thanks, Robert.

Thanks, Robert.

Your next question comes from the line of David Miller with Imperial Capital.

Yes, hey, guys. I have one for Mark and one for Sean. Mark, on our comments about XD, it would seem to me that what really works with XD and I have seen this in your Playa Vista theater over here in Los Angeles, are the event-driven films the tent poles, the action films, the action adventure films, but not necessarily the romantic comedies from a genre perspective? So, with you comments about XD expansion, I would think, I mean correct me if I am wrong, part of that analysis was making sure that you had enough supply to justify the investment. So, looking out over the next 3 years, do you think there is 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 calculation, 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 some new food concepts in the quarter? Thanks very much.

David thanks very mush. I will take the XD question. Let me just say the reason we are putting additional XDs in is because there is demand for them. I mean, the number one thing that the studios and our distributions partners want every week and it’s not just your big action adventure Tom Cruise in Top Gun and Wonder Women, it’s literally every week, I will give you a couple of examples. Crazy Rich Asians, which I would call a romantic comedy, did Gangbusters in our XD. Last summer, Lion King was through the roof in XD first ones just be sold out. And even as recently as last weekend, we held our XDs, we put Sonic into our XDs and again the first theaters to sell out our XD. The reasons we are putting second ones in some auditoriums is because of demand, it’s pure and simple. So, we are responding to consumer demand and also studio demand to be in the premium theatre. They love it, because their movies are number one seen in the absolute best format possible with the sound coming from all directions and wall-to-wall screen. And secondarily, they like the increased box office. So, it’s 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 are able to take advantage of that strong character driven line up, 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 pricing. So, it really was more just product sales more so than price which drove the concession benefits in the quarter.

Okay, thank you.

Thanks, David. Thanks for your questions.

Your next question comes from the line of Ben Swinburne with Morgan Stanley.

Thanks. Good morning. Mark, I just wanted to hear a little bit more on the deal you did with Cinionic, I guess one question, why do an exclusive deal, what is that due 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 some of the financial benefits that you highlighted? And then secondly, for either of you, do we need to be watching for virtual print fee roll-off in the U.S. circuit, there is some comments in the K about cost recruitment in late 2020 for DCIP, I just want to make sure we were sort of paying attention to the right stuff on the VPFs in the U.S.?

Okay, Ben, let me take the first one, which is the question on the Cinionic. First, I should say obviously we are under NDA with them, but let me speak to what I can. The reason for an exclusive deal from the strategic standpoint for us is we have what I think approximately recognized as the absolute best, a team of people in our theater technology. And they did an extensive research, I mean, extensive of every potential provider of – do 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 analysis that they had the best overall technology and cost long term cost of ownership and so we choose to do a deal with them which was financially beneficial for us and allowed us all the various items we needed to be comfortable in doing a long term ten year deal with them with every kind of flexibility that we may or may not need and the plan that we laid out is over a ten years we are very fortunate and that we have a very good group of Xeon bulb projectors right now 4K digital and we are going to methodically be able to roll out these lasers over a ten year period and in process as we put in new lasers and take out the Xeons we have an opportunity to take those projectors and use some parts as we go forward to extend the life of our existing Xeon bulb projectors so it really is the best of both worlds for us and we made a commitment to Barco, because we just felt like it was the best technology and the best overall financial deal for Cinemark.

Got it

And then on the this is Shawn I will take the DCIP on the DCIP question DCIP distributions that called deal and structure works a little bit differently than our international VPFs in Latin America we actually set up the whole financing arrangement for the digital projector conversion and the payments that have been made have been booked as an offset to film rental over the years and those are winding down there have been more space the way DCIP obviously was setup that was setup as a third party entity there had been excess this cash distributions that had been made to the various parties in DCIP over the years for us that has been about $5 million to $6 million a year now that DCIP is kind of coming to the end of its run the excess cash has been built up is going to be fully distributed so last year in 2019 we saw an increase of that again 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 2020 to about $5 million and then it will be zero there after so those come to us in the form of distributions and book these dividends into our company so it does not affect the 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 guys.

Thanks, Ben.

Thanks, Ben.

Your next question comes from the line of Jim Goss with Barrington Research.

Thanks. You outlined earlier the use of capitals for an equal parts for our new build maintenance and cash flow generating initiatives in terms of the appetite for new builds I was wondering if you could talk about the circumstances in which you would want to undertake those and like what synergies would be key and other things like branding and distribution competitive gap shopping center dynamics and advantages of starting from scratch are there other things that are really driving those decisions?

Jim I think I will take that. Let me tell you making new build decisions are what Sean and I consider to probably be the most important decision to be make every year because we are investing in the company’s capital upfront and then we are committing the company many times to 15 years of lease payments if we don’t build it and see so it has taken very, very carefully we have a fantastic 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 to build theaters so we are doing a couple of things one we are trying to protect the markets that we are 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 growing there and we went and then we are constantly looking for new areas that we can go into where either the theaters that are there are not up to par and give us an opportunity or there has been growth in new areas. So the Sacramento area, the Central Valley area of California; a whole bunch of areas in Texas, in Utah, we’ve 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 your comment on shopping centers, we have 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 were in there. And we have gone ground-up by carrying down old auto store centers and putting a theater in the parking lot of a very vibrant mall, just needed a new retailer. We have other places where we have gone inside structures themselves. We have one of those going on in Roosevelt right now, great mall, we are just going on in – we are going in the second floor and big sporting goods stores going in the bottom floor in Roseville, California outside of Sacramento. So we are actively and aggressively looking for new builds in the U.S. because we think there are ongoing opportunities for it.

Okay. And I guess it takes the pressure off of finding acquisition targets too, then?

Well, both. I mean, I think I am actually glad you brought that up 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 are only going to buy and put money down on acquisitions where it is accretive from day 1. So to the extent that we can find those, we can do that simultaneously with building new theaters.

Okay. And one other thing, to the extent that Latin America is less up and to 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 are always looking, but to this point, no, we obviously kicked the tires on everything that was taking place in the Middle East and decided not to enter that fray. We have looked in Asia and it looks like that’s probably not where we are going to go. And Europe seems pretty mature to us unless just a unique opportunity came our way, but right now, we are satisfied in doing deeper in the United States and Latin America.

Alright. Thanks very much.

Thanks, Jim.

Our final question will come from the line of Alan Gould with Loop Capital.

Thanks for taking my questions. Couple please. First, average ticket prices have been increasing at an increasing rate the past couple of quarters in the U.S., wondering what’s driving that? It’s obviously 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, they are not willing to go as often, so should we expect that to continue at this sort of rate that we have had this past year? And third, with respect to the acquisitions following up on Jim’s question, is part of the reason the company decided not to be more aggressive, would say, a buyback, because you think maybe if it is a weaker or a tougher year at the box office this year as many have expected, but there might be some acquisition opportunities that pop up in the U.S.? Thank you.

Thanks for the questions, Alan. This is Sean. I will take the first two and Mark will take the last one. On ATP, really the biggest driver of that do two things, one, we – looking at the beginning of this year we saw beginning of 2019, we saw what we believe to be a really strong film lineup and the way we have tinted 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. One of the other big benefits we derive is all the recliner conversions we have done, we have continued to see opportunities with demand to increase our pricing. There also is a little bit of beneficial mix incorporated in there, but really, it was the combination of being a touch more aggressive in 2019 and that the lift from recliners that kind of drove 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 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 high-end 21 and over concept that just has struggled to gain some traction. So, we tend to have a pretty conservative approach when we look at impairments of the company. We take a look at future cash flows based on current level of performance. So in down years that 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 hoping some of those bigger hits that we had in recent years. We won’t see them to that scale going forward.

I would just add one thing on this Alan as well. We have also recently increased our price on Movie Club. We have done on the East Coast, West Coast now central part of the country as well, so in about 96% of the country, we have increased the price from $8.99 to $9.99. We left a small part of the country out just as we could have a control group. But thus far we have seen no negative effect on it. Because what we found on Movie Club is that the consumer really is purchasing Movie Club for a variety of the benefits, some because of the concession benefit others because of the shareability and the rollover of it. So the price increase, the $1 price increase from $8.99 to $9.99 has had almost no negative effect relative to subscribers, especially since we added 100,000 net subscribers since our last earnings call. And we hadn’t increased the price since we launched Movie Club in December of 2017. So, that helped a little bit as well. Relative to your question on capital allocation, I really wouldn’t tie those two things together. It wasn’t a decision on the Board to say 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 the 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 investment opportunities. And then finally, how can we return 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 utilized capital that otherwise wanted to have available for other purposes and we thought like we had better opportunities to do so. So it really came down to that. It wasn’t an either/or position.

Mark, I just 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 to?

That’s really difficult to say. Honestly, we take that on a year-by-year, even quarter-by-quarter basis, because there is always going to be some theaters, where you just want to hold on to the seat count, because you need it and there is such a demand for it. So there is always going to be some of that, but it’s going to slowly creep up simply organically, because every new theatre that we build is of course reclined usually to theaters that are coming off their lease and we are not renewing are un-reclined. So I will put it this way. It’s clearly going to get north of 70, but I am not going to take it any further than that just because we have reevaluated on a constant basis.

Okay. Thanks for taking the questions.

Thanks, Alan. Appreciate it.

I will now turn the conference back over to management for any closing remarks.

We would 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. Bye now.

Ladies and gentleman, this concludes today’s call. Thank you all for joining. You may now disconnect.