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Edited Transcript of KIN.BR earnings conference call or presentation 22-Aug-19 10:59am GMT

Half Year 2019 Kinepolis Group NV Earnings Call

Bruxelles Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Kinepolis Group NV earnings conference call or presentation Thursday, August 22, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Eddy Duquenne

Kinepolis Group NV - CEO & Director

* Nicolas De Clercq

Kinepolis Group NV - CFO

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Presentation

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Eddy Duquenne, Kinepolis Group NV - CEO & Director [1]

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Welcome to all. Today, we published our half year results, and I'm happy to guide you through this presentation. I will comment on our key figures and accomplishments before giving the floor to Nicolas De Clercq, our CFO, who will add some more financial details.

First of all, let me summarize the key takeaways. Overall, the consistent execution of our company strategy and further investments in experience by means of premium products such as 4DX, Cosy Seats and Laser ULTRA resulted in a further increase in sales and EBITDA per visitor. The integration of Landmark Cinemas is on track, and a couple of Kinepolis concepts have been successfully introduced in a first selection of Landmark dealers. I will come back on this in a minute.

The rise in visitor numbers can be explained by the expansion of our activities in Spain, France and the Netherlands and particularly, a strong second quarter due to successful content like Avengers: Endgame, which has broken all box office records.

Lastly, we also made further steps in our expansion strategy as we have acquired 2 Spanish El Punt cinemas in the first half of the year, more specifically in Barcelona and Alzira near Valencia. The integration of those new acquired complexes is on track.

Let's now have a look at the key financials of the first half year. In terms of admissions, we welcomed 3.7% more visitors than in the first half of 2018. Revenues increased by 7.3%. You will see later on in this presentation that our visitor-related revenue increased by 6.7%, as such, outpacing the rise in visitor numbers.

The adjusted EBITDA was up by 10.3% to EUR 57.3 million. This is excluding the impact of the new IFRS 16 standard to make both reporting periods comparable. The adjusted REBITDA margin increased to 24.1% compared to the 23.4% of last year. The adjusted profit was up by 10.5% to EUR 20.6 million, again, excluding the IFRS 16 impact. Earnings per share increased by 10% to EUR 0.77. The free cash flow increased by 60.8% to EUR 25 million, and the net financial debt increased by 12.3% to EUR 310.8 million.

Here, you can see the figures, taking into account the IFRS 16 correction, which concerns the accounting treatment of lease contracts. As you can see, this has a severe reporting impact, resulting in a significantly higher adjusted EBITDA of EUR 70.1 million and a lower adjusted profit of EUR 18.9 million. The net financial debt reporting is also heavily impacted by the new IFRS 16 standards.

Our performance in the first half of the year, again, results from the consistent execution of our strategic pillars as set out in 2008. Since more than 10 years, we focused our efforts on being the best marketeer, the best cinema operator and the best real estate manager. We will continue to further develop and implement these pillars. As best marketeer, we want to constantly adapt and expand our offering to attract new audiences and meet the expectations of different target groups. We continue to invest in adding experience for customers through our premiumization strategy.

As the cinema operator, we will continue to provide the best experience to our customers by means of a strong bottom-up management approach with clear budget ownership resulting in maximum empowerment of our employees. And last but not least, constantly optimizing and developing our real estate portfolio remains an important pillar for our company.

Let me take you through some highlights of the past 6 months. In March, we acquired the El Punt cinemas in Spain. Both cinemas, namely in Barcelona and Alzira, have been integrated successfully so far. We continued the replacement of our projection systems by laser projection as set out in the agreement we concluded last year with Cinionic. 175 screens have now already been upgraded to laser.

We invested in the further rollout of premium experiences such as our own Laser ULTRA concept and 4DX. Several new Laser ULTRA theaters have been opened in Europe, and we introduced it to Canadian moviegoers as well as we opened the first Laser ULTRA theater in Canada at our Shaughnessy location. Feedback of customers has been overwhelmingly positive so far.

Another Kinepolis concept that has been introduced in Canada is our self-service shop, which is called MarketPlace in Kanata. After a successful test in Kanata, we opened the second marketplace in Whitby. Further, we reopened Kinepolis Rouen, a former UGC complex, which has been completely renewed and transformed to suit Kinepolis standards.

The former Utopolis complex in Zoetermeer has also been transformed to Kinepolis, which means that all former Dutch Utopolis cinemas have now been rebranded to Kinepolis. And lastly, we took a big step forward with regards to the renovation of Kinepolis Kirchberg as the new shop has been installed as well as a brand-new 4DX theater. Kinepolis Kirchberg will be officially inaugurated this fall.

In Europe, most of our 3D systems have been replaced by RealD equipment for a premium 3D experience. The remaining will be placed in the coming months, and the rollout in Canada will be completed in the course of next year. We announced as well a deal with CJ 4DPLEX for the opening of 6 ScreenX theaters and to be concluded a successful private placement of bonds, which allowed us to collect EUR 225 million to finance current and future acquisitions.

Before we proceed, let us show you what ScreenX is about. Our first 5 ScreenX theaters will be opened before the end of this year.

(presentation)

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Eddy Duquenne, Kinepolis Group NV - CEO & Director [2]

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Let me take you through the expansion highlights of the first semester. We started the year with the announcement of a new build project in Servon in France and a new Landmark cinema in Regina. Both will be opened in the fall of this year.

In March, we completed as well the acquisition of El Punt, as said earlier. We closed a small cinema in the center of Nîmes to focus all efforts on our multiplex in the same region, and we sold a 2-screen cinema complex in Kamloops, Canada.

In April, we announced another new build project in Canada in Southeast Edmonton, and we started construction works of the new Landmark cinema to open at Calgary Market Mall.

An update of the ongoing procedures related to the behavioral conditions imposed on Kinepolis Group by the Belgian Competition Authority. After the annulment of, for procedural reasons, of the decision taken by the Belgium Competition Authority to relax the behavioral conditions imposed on Kinepolis Group, the BCA took a new decision in March of this year. The competition authority decided to tighten its decision previously taken as only the opening of cinema complexes with 7 or fewer screens and a limited seating capacity will be no longer subject to its approval. As we did not agree with this outcome, we launched an appeal against the decision of the BCA.

An overview of our cinema complexes to date. Today, we have 97 complexes, of which 45 in ownership and 902 screens. This is including the cinema in Poland, which is operated by Cineworld. Here, you can see the planned greenfields. In France, in a couple of weeks, we will open a brand-new 9-screen cinema complex in Servon. Further, in the Netherlands, the acquisition agreement with NH Bioscopen included a new build project in Haarlem, for which we are awaiting the necessary permits. And in Canada, we are working on 3 new build projects, as previously announced, namely the Market Mall project in Calgary, a new complex in Regina in the province of Saskatchewan, which will open this fall and the newly announced project in Southeast Edmonton, Alberta, which will open next year.

Let's have a look at the breakdown of our revenue by country. As you can see, Canada represents now 26.7% of our total revenue, and the share of Belgium, still Kinepolis' #1 market, has decreased to 29.4% due to our expansion in Spain, France and The Netherlands. And here's the breakdown of our revenue by activity. Box office now accounts for 55.3% of total revenue; in-theater sales represent 28.3%; business-to-business, 10.9%; and real estate, 2.9%. Brightfish and film distribution, 2 activities that are limited to the Belgian market, account for 2% and 0.6%, respectively.

When we look at the detail of the visitor numbers per country, we see that visitor numbers in The Netherlands, France and Spain increased significantly, which is due to our expansion in these territories. A strong second quarter with successful blockbusters such as Avengers: Endgame and the absence of the World Cup football compared to last year also contributed to the rise in visitor numbers.

In Belgium, the weaker first quarter was not entirely offset by the strong second quarter. But in the meantime, Belgian visitor numbers are also back on track, thanks to a good summer holiday. In Canada, the visitor numbers decreased slightly by 2.8%, but this is entirely due to the record box office year 2018 in North America.

Here, you can see the top 5 movies of the first semester compared to the top 5 of the first semester 2018. Absolute #1 was Avengers: Endgame with more than 2 million visitors followed by Captain Marvel, Aladdin, How to Train Your Dragon: The Hidden World and Dumbo.

Let's have a look at the content for the second half of the year. Current hits include The Lion King, of course, Toy Story 4, Spider-Man: Far from Home, Fast & Furious Presents: Hobbs & Shaw and Once Upon a Time in Hollywood. Upcoming hits include, among others, It Chapter 2, Frozen 2, Downtown Abbey, Joker, Gemini Man and Star Wars: The Rise of Skywalker. The local film offering looks also promising and as always, our alternative program includes live opera, ballet, concerts and exhibitions. Thank you for your attention.

I'm pleased to give the floor now to our CFO, Nicolas De Clercq, who will further explain our financial results.

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Nicolas De Clercq, Kinepolis Group NV - CFO [3]

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Thank you, Eddy. Also on my behalf, I would like to welcome you to this presentation. Let me guide you through the financial review of the first semester of 2019.

First, some words on IFRS 16. The new IFRS 16 standards has become effective as from the 1st of January 2019. The standard has a major impact on the accounting treatment of leases. IFRS definition of leases entails not only the leases, but also the rent contracts. The balance sheet will grow due to the fact that all material leases will be booked on asset and liability side of the balance sheet. The implementation of IFRS 16 has led to not only a shift between operating costs, which are above EBITDA, and depreciation and financial results, which are below EBITDA.

IFRS 16 also front-loads expenses due to the calculation of interest. Over the period of the contracts, expenses remained equal but are spread definitely over time. For the income statement, only the service component of a lease will stay above EBITDA, and the other components will be reported under EBITDA, respectively, under the lines depreciation and interest expenses. In the past, these leases and rents were all in balance sheet rights and liabilities. But after the implementation of IFRS 16, we have to record right-of-use assets on the asset side and lease liabilities.

To summarize, EBITDA will increase, depreciations and financial costs will increase as well, net profit will decrease, balance sheet will increase, reported debt will increase, operational cash flow will increase, but economically, nothing will change.

We have performed an analysis on all our rent and lease contracts. As you know, in Canada, we rent most of our buildings, so main impact is on the Canadian operations. Kinepolis has chosen for the modified retrospective approach, and this will lead to an increase of the EBITDA of EUR 24.5 million and a negative effect on net profit of about EUR 3.3 million. The opening balance sheet will change, and the assets will increase with EUR 294.5 million, and the lease liabilities were EUR 311.1 million. Our balance position per 31st December 2018 for provisions for on-risk contracts, leasehold inducements and rent equalizations were offset against right-of-use assets. The implementation of IFRS 16 will influence, of course, many financial ratios but will not change the risk profile of the company nor will it have effect on the financial covenants with our banks.

Revenue increased by 7.3% to EUR 238.1 million and adjusted EBITDA, excluding IFRS 16 impact, increased to 10.3% to EUR 57.3 million or a margin of 24.1%. We saw an increase in revenue in all the business lines, except for concessions at Kinepolis Film Distribution. The increase in cinema revenue, which is box office and in-theater sales combined, was higher than the increase in visitor numbers. Thanks to the implementation of our strategic pillars and continuous innovation, we were once again able to increase EBITDA per visitor even with a negative country mix effect of Belgium.

Including IFRS 16, the adjusted EBITDA was EUR 70.1 million with an adjusted EBITDA margin of 29.4%. The increase in visitors of 3.7% led to an increase of revenue of 7.3%. At constant exchange rate, revenue increased with 6.6%. The increase in revenue was higher than the visitor increase in most countries except for Spain, thanks to an increase of revenue per visitor in box office and in in-theater sales and an increased B2B income.

In Spain, the revenue increase was a bit lower than the visitor increase. This is due to the integration El Punt with lower average ticket prices and less B2B. In Belgium, the revenue decreased with only 2.5% compared with a visitor decrease of 10.7%. The decrease of visitors in Belgium was caused by the results of the first quarter. Q1 2018 was a very strong quarter, thanks to the success of local movie success, Patser, De Buurtpolitie and K3 Love Cruise.

In Q2 2019, Belgium recuperated partly this decrease with an increase of visitor of 10.1%. At the moment of publication of this webcast, Belgium compensated completely the minus 10% and showed growth again compared to last year. The revenue evolution was better than the visitor evolution, thanks to the increase of cinema revenue per visitor, more B2B and more revenue from Brightfish. This increase was offset by a decrease in concessions and film distribution.

Due to expansion and further growth in the other countries, the share of Belgium in revenue dropped to 29.4%. In France, revenue increased with 10.3% compared to a visitor increase of 8.9%. In France, the visitor evolution is explained by the growth of new complexes such as Fenouillet, Brétigny and KLUB Metz. Cinema revenue per visitor and B2B further increased.

Canada, which is in terms of revenue, the second most important country of the group with a share of 26.7%. The North American market decreased compared to last year due to difficult comps with the success of, amongst others, Black Panther, Jumanji and Avengers. Despite a visitor decrease of minus 2.8%, revenue increased with 5.3%, thanks to increased box office and in-theater sales per visitor and more B2B.

In Spain, revenue increased with 29.8% together with a visitor increase of 32.4%. There, we saw an increase in the existing locations, locations opened the past few years and of course, the effect of the integration of El Punt. The revenue increased in all business lines, except for a small decline in concessions. The growth of revenue was less than the visitor numbers due to a smaller growth in B2B and the integration of El Punt with a lower box office per visitor.

In the Netherlands, revenue increased with 16.3% and visitors with 14%, thanks to the growth in new and existing locations and the opening of Kinepolis Den Bosch in the second half of June last year. The revenue increased faster than the visitor number, thanks to increased cinema revenue per visitor, lower sales and events and screen advertising, somewhat compensated by a low real estate income.

In Luxembourg, revenue increased with 13.1% compared to a visitor increase of 0.7%. Revenue increase is a lot higher than visitor increase, thanks to higher box office and consumption per visitor and more B2B.

In the other countries, namely Switzerland and Poland, we had an increase in revenue of 2.7%. Cinema revenue consists of box office and in-theater sales and represents 83.6% of total revenue. In H1 2018, this was 84%. Box office, which represents 55.3% of total revenue, increased with 5.7% compared with the visitor increase of 3.7%.

Nevertheless, the negative country mix effect due to the decrease of the share of Belgium, box office revenue increased more than the visitor numbers due to growth per visitor in all countries except for Spain. The average box office per visitor increased with 1.9% to EUR 7.43, but the country mix effect was minus 0.7%.

In all countries except for Spain, we saw an increase in the average box office per visitor, thanks to the positive impact of premiumization and inflation compensation measures. We had more income out of Cosy Seats, sale of 3D glasses, alternative content, 4DX and the positive impact of price increases, somewhat negatively compensated by a decrease in VPF revenue. Only Canada and Switzerland still receive some VPF income.

The increase of box office per visitor can be explained by: a positive price impact of 2.1%; a positive product mix of 0.6%, thanks to more income from premiumization like Cosy Seats, a higher share of alternative content and an increased share of 3D; a negative country mix effect of 0.7% due to the decrease of the share of Belgium. Other effects were responsible for a decrease of 0.1% due to less Virtual Print Fee revenue, partly compensated by more income from the sale of 3D glasses.

In-theater sales, which represent 28.3% of total revenue, increased with 8.8%, which is more than the visitor number, thanks to the growth of in-theater sales per visitor in all countries. Average in-theater sales per visitor increased with 4.9% to EUR 3.81, thanks to more visitors in the shop and the higher basket size, somewhat negatively compensated by the decrease of the share of Belgium in the results.

The total increase can be explained by, in order of importance: the product mix, which led to an increase of 7.9%. We saw more people visiting the shops in all countries, except for the Netherlands, which led to our highest transaction volume. The basket size, which is the number of product bought, increased in all countries. The spend increased, thanks to more premium popcorn and the introduction of additional drink concepts and a favorable content for in-theater sales.

The country mix, which led to a decrease of 3% due to the decrease of the share of Belgium. Sales and events, together with screen advertisement, B2B revenue grew with 10.4% and is responsible for 10.9% of revenue. Sales and events increased with 10.5%, thanks to growth in all the countries and more income from vouchers, more deals with partners and more events.

Screen advertising, excluding Brightfish, was 9.7% higher than last year, thanks to growth in all countries, except for Canada. At flat exchange rates, real estate revenue decreased with 2%. The decrease was mainly caused by less income from owned concessions, less parking income in line with the visitor number in Belgium. Revenue from Brightfish, which represents only 2% of revenue, increased with 98.6%. There were more events and partner deals, and we also saw quite an increase in national and local advertising revenue.

Revenue from film distribution, 0.6% of total revenue, decreased with 39.9% due to less releases and a difficult comparison with the successful releases in Q1 last year such as Patser, De Buurtpolitie 2 and K3 Love Cruise.

Total revenue increased from EUR 221.8 million to EUR 238.1 million. Except for KFD and concession sales, we saw an increase in revenue in all the business lines and in visitor-related revenue and increased higher than their visitor number. Adjusted operating costs increased with 9.8%, this compared to the revenue increase of 7.3%.

The increase in marketing and selling expenses of 7.3% can mostly explain by more partner deals somewhat compensated by less publicity costs. The increase in administrative costs of 8.2% can be explained by the investments and the support structure in Canada to support the implementation of the Kinepolis operating model and increased depreciations. Other operating income costs decreased due to some legal fees.

The adjustment items had an impact on EBITDA of EUR 0.8 million mainly due to costs related to expansion and reorganization after expansion. A reversal of a deferred tax liability due to the fact that Alberta lowered its provincial income tax rate from 12% to 8%, which led to an adjustment of EUR 0.6 million on the taxes. The adjusted EBITDA per visitor increased in all countries except for Belgium due to the visitor evolution and for Canada due to the investments in support.

The adjusted EBITDA per visitor, excluding IFRS 16 impact, increased from EUR 3.04 to EUR 3.23 or an increase of 6.4% despite the negative effect of the country mix due to the decreased share of Belgium. After IFRS 16, the adjusted EBITDA per visitor is EUR 3.96. The adjusted EBITDA margin, excluding IFRS 16 impact, increased from 23.4% to 24.1%.

The absolute adjusted EBITDA increased in all countries, except for Belgium and Canada. The Netherlands, Spain and France showed an important increase in adjusted EBITDA. The decrease on the adjusted EBITDA in Belgium is caused by the visitor evolution despite the increased revenue and profits per visitor.

The adjusted EBITDA of Canada decreased somewhat due to the investments in the Canadian organization. Total adjusted EBITDA, excluding IFRS 16 impact, increased with 10.3%, especially thanks to the expansion in the Netherlands, Spain and France. When we have a look at the cinema activities in the different countries, so excluding the corporate entities Brightfish and KFD, you can see that adjusted EBITDA percentage compared with adjusted EBITDA before end of 2018 stayed stable on a group level despite the negative impact of the country mix.

In the Netherlands, the adjusted EBITDA margin increased, thanks to the increased contribution of the complexes and ownership opened or acquired the past few years. Adjusted depreciations and amortizations were EUR 3.6 million higher than last year due to investments and openings of new complexes and EUR 11.1 million due to the implementation of IFRS 16.

The repayment of the retail bond in March led to a decrease in interest expenses of EUR 0.9 million, but the impact of IFRS 16 led to an increase of EUR 4.2 million. The adjusted effective tax rate further decreased from 31% to 30.2%. This decrease in adjusted effective tax rate is thanks to lower provincial income tax rates in different countries.

A reversal of a deferred tax liability led to an effect of EUR 0.8 million on the taxes. Biggest part of that impact or EUR 600,000 was caused by Canada. The territory of Alberta lowered its corporate income tax rate from 12% to 8%, which will lower the average Canadian income tax paid from 27% to an estimated 25.5% in 2021.

The impact of IFRS 16 led to an increased EBITDA, but also increased depreciations and higher financial costs. Therefore, the adjusted EBITDA of EUR 70.1 million led to a profit of EUR 18.8 million or EUR 0.1 million lower than last year's same period. Investments slightly decreased from EUR 57.5 million to EUR 55.3 million.

The maintenance CapEx increased from EUR 5.3 million to EUR 12.4 million due to EUR 4.4 million more investments in projection and sound and more maintenance investments in Canada, more HVAC investments and the growth of the group. The projection and sound investment increase is caused by the replacement of all 3D systems to new RealD systems, of which the biggest part was done in the first semester, and the laser upgrade process, of which the main part for this year was also installed in the first semester.

The internal expansion CapEx, which always needs a business case, increased from EUR 8.5 million to EUR 12.1 million. Investments in the recliners and Mega Candys in Canada, 4DX investments in Europe, investments in remodeling, 3D sound and further Cosy Seating rollout explains this amount. The external expansion investment of EUR 30.8 million consists for the biggest part out of the acquisition of El Punt for EUR 26.5 million, the construction of Servon in France, Calgary Market Mall, Regina and Tamarack in Canada.

Compared to last year, free cash flow increased from EUR 15.6 million to EUR 25 million. This increase of EUR 9.4 million was thanks to the high EBITDA result and the working capital evolution of EUR 9.7 million, negatively compensated by the higher maintenance CapEx.

The higher EBITDA result is partly reflected in higher lease liabilities payments. This is due to the implementation of IFRS 16. Working capital was EUR 9.7 million higher than last year due to a bad Q4 2018, which led to less payments in Q1 and the higher payables in June due to the better month of June compared to last year.

The net financial debt, excluding lease liabilities, went up from EUR 276.8 million to EUR 310.8 million or an increase of EUR 34 million. This can mainly be explained by an EBITDA cash result of EUR 67.5 million minus the investments of EUR 54.8 million, dividend payment of EUR 24.7 million, EUR 3.7 million negative effect of working capital, EUR 6.4 million taxes paid and EUR 6.6 million interest paid.

The leverage ratio of 2.33 increased to 2.5. In H1 2018, the leverage ratio was 2.67. The debt level is always at its highest during summer given the seasonality of the business. The adjusted EBITDA margin increased despite the lower share of Belgium to 24.1%, excluding IFRS 16 impact.

The ROTCE decreased slightly to 15.4% due to further investments and expansion. Gearing increased to 1.76 mainly due to the increased debt. The financing structure of the company changed in the first half of 2019 due to the repayment of the retail bond of EUR 59 million and a very successful private bond placement of EUR 225 million. Market demand was again higher than the offer.

When we exclude the RCF, which is not drawn at the moment, the average maturity of the debt is more than 5 years. The balance sheet total increased from EUR 680.9 million to EUR 986.3 million mainly due to the IFRS 16 impact, which led to a EUR 316.5 million increase in assets for H1 2019.

The equity decreased slightly from EUR 177.4 million to EUR 176.5 million due to dividend payment of EUR 24.7 million partly offset by net profit of EUR 18.8 million and an increase in other comprehensive income of EUR 4.7 million. The current ratio decreases to 0.38 due to the repayment of the retail bond. On the shareholder side, no major changes have occurred.

Kinehold Bis, Pentascoop and Mr. Joost Bert own 48.21% of the shares of the company. On the last slide, you can see the dates on the financial calendar 2019, 2020. Thank you for your attention.