Carmike Cinemas, Inc. (NASDAQ:CKEC)
F3Q08 Earnings Call
November 10, 2008 5:00 pm ET
Joe Jaffoni, Investor Relations
Michael W. Patrick - Chairman of the Board, President, Chief Executive Officer
Fred W. Van Noy - Chief Operating Officer, Senior Vice President, Director
Richard B. Hare - Chief Financial Officer, Senior Vice President - Finance, Treasurer
David Miller - Caris & Company
James Marsh - Piper Jaffray
Welcome to the Carmike Cinemas 2003 third quarter conference call. (Operator instructions) I’d now like to turn the conference over to Mr. Joe Jaffoni, Investor Relations. Please go ahead.
Thank you, operator, and good afternoon, everyone, and thank you for joining us.
Before we get started, I’d like to read the Safe Harbor statement. Certain statements by Carmike’s management of today’s 2008 third quarter conference call may constitute forward-looking statements.
Such statements are subject to risks, uncertainties, and other factors that may cause Carmike’s actual performance to be materially different from the performance indicated or implied by such statements.
Such risks, uncertainties, and other factors are set forth in the company’s annual report on Form 10-K for the year ended December 31, 2007 and other filings with the Securities and Exchange Commission. Carmike undertakes no obligation to publicly update or revise any forward-looking statements.
I’d now like to turn the call over to our host, Michael Patrick, Carmike Cinema’s Chief Executive Officer. Michael?
Thank you. I’m Michael Patrick. With me I have Richard Hare, our Chief Financial Officer, and Fred Van Noy, our Chief Operating Officer. We would like to welcome you to our third quarter earnings conference call.
On today’s call, we would like to address our third quarter results, update you on our latest expansion of our 3D footprint, and provide expectation for fourth quarter box office, which will include our holiday lineup of film. We will also discuss our improvements and our per patron metrics, our reduction and the measure we are taking to reduce our leverage.
Our third quarter box office revenue was driven primarily to the success of the Dark Knight. Today, the Dark Knight has generated nearly $527 million in domestic box office and is the second highest domestic growth of all time.
Although we were helped by the strong box office performance of the Dark Knight, our third quarter box office revenue declined approximately 3% on a per screen basis from last year’s third quarter. This was in part due to a record box office during the third quarter of last year, which was carried by strong box office performances of Transformers, Harry Potter, Bourne Ultimatum, and Ratatouville.
During the second quarter of 2008, we implemented a strategic mission and concession price increase, which had allowed us to realize an average kick increase of 7.6% over the third quarter of last year and an average concession per cap increase of 5.9% over the same quarter last year. Average ticket increased by $0.44 from $5.79 to $6.23 and our concession per cap increased by $0.18 from $3.04 to $3.22. Our total average per patron during the third quarter reached $9.45. We are now forced to break the $9.50 per person barrier.
We are closely monitoring our expense controls and have a significant reduction in our operating costs, specifically salaries, and general theater expenses. We realized to export the benefits of our ROI salary control that were implemented during the second quarter of 2008. We had been successful in reducing general and administrative expenses by 14% compared to last year’s third quarter.
We have also made meaningful progress in further reducing our interest expense which declined 17.3% during the period. In addition, we made a $10 million bank debt prepayment in the third quarter. Over the past 12 months, we have made approximately $33 million of payments against our outstanding debt.
The company continues to focus on operating performance improvements and selling surplus property in order to de-leverage our balance sheet. As previously announced, in light of the continuing challenging conditions in the credit market and in the wider economy, the company’s board of directors suspended Carmike’s quarterly dividends.
Over the past four quarters, Carmike’s dividend payments amounted to approximately $9 million dollars. Going forward, the company plans to allocate its capital primary to reducing its overall leverage.
Moving to our digital program, we are in the final phase of our 3D rollout with the installation of 72 more 3D screens scheduled for completion during our fourth quarter. We have completed our capital program for both our digital projection and our 3D rollout. Circuit-wide, we had installed 2,159 digital projectors at 231 locations, which represents 44% of the US domestic total.
Of our 2,159 digital auditoriums, 499 auditoriums are 3D equipped, which represents 38% of the total US domestic number of 3D screens.
Our first run locations are all 100% fully digital and each location has between one and six 3D equipped auditoriums based on the screen count of these theatres. Typically, our six through ten screen locations have two 3D auditoriums. Our 11 through 14 screen locations have three 3D auditoriums. Our 15 through 18 screen locations have four 3D auditoriums and our 20 screen locations have five 3D auditoriums with our thoroughbred 20 located in Franklin, Tennessee having six 3D auditoriums.
With our auditorium right side configuration, along with the amount of 3D auditoriums that we have available, we have the flexibility to place multiple 3D movies in a variety of different size auditoriums. We are very pleased with our industry-leading position in digital projection and 3D.
With the success of this year 3D releases of Hannah Montana, Journey to the Center of the Earth, and Fly Me to the Moon behind us, we look forward to the November release of both in 3D. We continue to view 3D technology as a key component in supporting our box office performance during the coming year.
Scheduled for release in 3D during the first quarter of 209 is My Bloody Valentine, Caroline, Disney’s Jonas Brothers in Concert, Jeffrey Katzenberg’s Monsters Vs Aliens.
The second quarter has animated 3D films targeted for Memorial weekend. The third quarter of 2009 begins with Ice Age: Dawn of the Dinosaurs in 3D, followed by three more 3D films. G-Force, Piranha, and the horror film Final Destination IV. The re-release of Toy Story in 3D on October 2 begins the fourth quarter 2009. With Disney’s A Christmas Carol in 3D starring Jim Carey starting Thanksgiving and James Cameron’s Avatar in 3D zeroing in on Christmas. 3D will surely play a large part of 2009 box office. The year 2009 looks to be a terrific year for 3D.
Moving briefly to our fourth quarter box office, we are encouraged by the strong box office performance of Eagle Eye, Beverly Hills Chihuahua, Fireproof, High School Musical, and of course Saw V, all of which generated higher than expected revenue during the month of October.
The remaining film slate for the balance of the fourth quarter look extremely attractive. Our November release schedule includes Madagascar, which opened up to a little over $63 million, another James Bond film, both in 3D. Twilight, Four Christmases, and Australia. We will round out the holiday release schedule with December’s releases that include The Day the Earth Stood Still with Keanu Reeves, Jim Carrey in Yes Man, The Curious Case of Benjamin Button with Brad Pitt, Marley and Me starring Owen Wilson and Jennifer Aniston and Disney’s Bedtime Stories with Adam Sandler.
In closing, although our third quarter box office was below last year’s results, we are pleased with the progress of our cost control efforts and debt reduction. We are anticipating positive box office results for the remaining of this year’s lineup and are optimistic about our strong start of the fourth quarter.
Our industry-leading position in digital projection and our expanded 3D footprint will further enable us to take full advantage of the growing slate of 3D title in the coming months.
Now I would like to turn the call over to Fred Van Noy.
Fred Van Noy
Thank you, Michael. I’d like to begin by giving some specifics on our expense control initiatives.
Our operations theme has been focused on reducing our expenses all year and did a good job in the third quarter by reducing our salary cost by approximately $1.4 million dollars this quarter compared to last year’s quarter.
Operating expenses will remain a target of ours as we continue to look for efficiencies and improve this area of our business.
We experienced a slight increase in our concession cost on a percentage basis for the quarter compared to last year’s quarter and we continue to look at our retail pricing structure to maintain our margins.
For the quarter, we are reporting concession cost 11.4% of concession and other revenue, one of the lowest metrics in the industry. While holding to our plan of only offering five profitable items to our customers, primarily soft drinks, popcorn and a small selection of candy, we continue to see our concession and other revenue per caps trend upward once again for the third quarter at $3.22 versus last year’s quarter of $3.04, a 5.9% increase over last year’s quarter. Although our attendance was down for the quarter, we were able to make up some of this loss by box office price increases, which went into effect in April. Our average ticket price for the quarter came in at $6.23 versus last year’s quarter of $5.79, a 7.6% improvement.
This average ticket price improvement was also held by our success on Journey to the Center of the Earth 3D as we were able to once again charge a premium for the 3D technology. Our impact on Journey 3D more than tripled our share of the national box office on 3D results for this film. We played this movie at 187 of our locations reaching all the way down to our smaller markets like Hopkinsville, Kentucky and Butte, Montana.
The company also implemented a strategic price increase at the end of October that we estimate will result in a 2% improvement overall in average ticket price growth. As Mike mentioned, 3D continues its momentum in the fourth quarter with Disney’s Bolt opening November 21, just prior to the Thanksgiving holiday.
Improvements in this technology continue to bring the best in presentation with each 3D movie release and the added value to the movie going experience is recognized by our audience.
We are in the final rollout phase of our 3D program as we are in the process of installing our semi 3 3D units through the circuit. Carmike is in a position to capitalize on the wave of 3D product in the pipeline and we are very excited with the 2009 pictures offered in 3D, such as the Jonas Brothers 3D concert, Monsters Vs Aliens 3D, Disney’s animated 3D Up, and Ice Age 3 3D, as well as Coreline 3D and Key Force 3D, all of which are scheduled to play before July 30.
Our plan to monetize some of our real estate value continues on pace with the sale of our share of a theatre partnership we had in Iowa. The transaction of this theatre that was viewed by the company as having a limited future. We were able to realize a sale of $2.7 million dollars, resulting in an almost a quarter of a million dollar gain.
We also were able to sell one of our weaker performing locations in Birmingham, Alabama to a local church for a very attractive multiple to current cash flow. The company closed five theatres with 18 screens in the third quarter through national lease expirations and we closed one owned twin theatre in addition to the previously mentioned location in Birmingham for a total of 14 owned screens.
We have several properties under contract and expect at least one property to close in the fourth quarter. Should this property close as anticipated, the company will realize a total monetized value on surplus property with over $11 million in 2008.
We opened a 12 screen all stadium, all digital facility, our first new location for 2008 on October 31 in Dolton, Alabama and we plan to also open a new 8 screen theatre in Ardmore, Oklahoma, and a new 12 screen theatre in Morristown, Tennessee, both all stadium, all digital faculties, in the fourth quarter. Each of these locations will be 3D capable and 25% of their respective auditorium count.
Looking forward to 2009, our expansion plans are to open a new 12-plex in Dalton, Georgia, a 12-plex in Florida, a 14-plex in Billings, Montana, a 12-plex in Chattanooga, Tennessee, and a 10-plex in Warrensburg, Missouri. All of these locations will offer the best in amenities, including stadium seating, digital projection, and of course 3D in at least 25% of the auditoriums.
We have a number of other locations in the negotiation stages that could give us additional locations further in the late 2009.
All of our new theatres going forward are build to suit projects with the developer being responsible for the building cost of the project, leaving us with minimal capital requirements.
You can easily see the remains of these markets just mentioned that Carmike continues to focus our business plan in small town America, where we can either be the sole theatre operator in the market or the dominating operator.
We closed 2008 with an exciting lineup of film in the fourth quarter. There are seven highly anticipated wide release films opening during the week of Christmas. This should generate robust holiday sales that should continue into the first month of 2009.
I would like to now turn the conference over to Richard.
Thanks, Fred and good afternoon, everyone.
I’d like to provide you with some financial highlights from Q308 and update you on Carmike’s capital structure.
On a per screen basis, our box office decreased approximately 3%. Our ticket price increased 7.6% to $6.23 and our average concession and other per person increased 5.9% to $3.22 in Q308 compared to the previous year period.
Both of these were primarily driven by our previously announced price increases we initiated in the second quarter of this year and the fourth quarter of last year.
As Fred mentioned earlier in the call, we initiated an additional price increase in our box office concessions in October of this year and we will continue to evaluate market conditions for future pricing opportunities.
Also, in addition to our traditional pricing strategies, we continue to see our 3D technology as a key component in supporting our box office performance.
We continue to transition our 3D ticket premiums from $2.00 to $2.50 per person. We are currently charging a $2.50 upcharge in about a quarter of our 3D locations.
Our top line revenue declined 7.4% to $122.9 million in the third quarter compared to $132.7 million in the year ago period.
Breaking down our total revenue, admissions revenue declined 6.9% to $81.1 million versus $87.1 million in the prior year period, and concession and other revenue fell 8.3% to $41.8 million compared to $45.6 million in Q3 of last year.
At the quarter end, Carmike had 250 theaters and 2,276 total screens. Film exhibition costs decreased 5% during the quarter and represented approximately 56.4% of admissions revenue.
Concession costs declined 2% during the quarter, representing approximately 11.4% of concessions and other revenues.
Other theater costs fell 2% to $49.4 million primarily as a result of lower personnel and occupancy costs.
As I commented on our last quarter call, we are pleased with our continued progress on the expense reduction front. I want to emphasize here that we’re constantly reviewing all of Carmike’s operating costs and expenditures and we strive to affect further cost savings and operational efficiencies and expect to have further progress on this front in the coming quarters.
Carmike’s Q3 theater level cash flow, a non-GAAP measure, declined by approximately $6.1 million dollars to $23 million dollars compared to Q307 levels. We defined theater level cash flow as operating income before general and administrative expenses, depreciation and amortization expenses, gain or loss of sale of property and equipment, as well as any non-cash charges.
As Mike mentioned earlier, during the quarter, we realized a 14% year-over-year reduction in general and administrative expenses compared to Q307. This decrease was primarily a result of lower salary and wage expense and legal and professional fees.
Excluding non-cash deferred compensation, the general administrative expenses totaled $4.1 million during the quarter, representing a 10% reduction over last year’s period. We are pleased with our continued progress in improving our efficiency and lowering these general and administrative costs.
During the 2008 third quarter, we recognized a $1.3 million dollar gain on the sale of property and equipment. Our real estate group has made much progress on selling surplus property and equipment and I’ll get into that in just a moment.
Operating income for the third quarter decreased to $9.7 million compared to $13.9 million in the period last year.
The quarter was also another period of progress in reducing our net interest expense. In Q3, we lowered net interest expense by 17% to $9.8 million dollars. As Mike stated earlier, our board has suspended Carmike’s dividends for the foreseeable future and its current mandate is to pay down bank debt with free cash flow. As a result, you should see our net interest expense continue to come down in future reporting periods, absent any material interest rate increases.
Turning to discontinued operations which appear separately on our income statement. As a result of theatre closures, the company closed in ten theatres and three and nine month periods respectively in 2008. With the three-month period ended September 30, 2008, we reported a $227,000 loss from discontinued operations.
Our real estate group continues to work on finding the best use of our portfolio of excess property and 35 millimeter projectors. During the quarter, we sold $6 million dollar of property equipment and joint venture interest. To date, we have sold $8.9 million dollars of assets and we expect to sell a total of between $10 to $12 million for the year.
Capital expenditures for the nine-month period ended September 30 2008 were $7 million and our cash needs on a going forward basis remain modest. We anticipate our capital needs to be approximately $13 million for the year.
In the prior year, we incurred additional costs associated with our digital conversion. In the current year, we have shifted our expansion strategy to include only build-to-suit projects that require very little capital spending by Carmike.
This strategy enables the company to expand our footprint with minimal capital requirements. We can use the excess cash to further pay down debt. We anticipate opening two theaters during 2008 and closing an additional nine theaters by the end of the year.
Looking at our balance sheet at September 30, cash and cash equivalent balance was $7.8 million, a total debt outstanding, which includes long-term debt and capital lease of long-term financing obligations was $404.2 million dollars, down from $415.1 million dollars at the end of June. As you know, we prepaid an additional $10 million dollars of term debt at the end of the quarter, which lowered our bank debt balance to $284 million dollars.
The company’s current debt structure excluding capital lease and financing obligations consists primarily of borrowings under our existing credit agreement. As of the end of the quarter, we had $161.6 million under our term loan and $122.6 million under our delayed draw term facility. Our $50 million revolving credit facility was untapped at the end of the third quarter.
As of September 30, the average interest rate on our borrowings was 6.38% based on the six-month libel rate. Carmike’s revolving facility mature in May 2010 and our term loans expire in May 2012.
We remain in compliance with the provisions of our bank debt during the third quarter. Our leverage ratio of consolidated debt to adjusted EBITDA is approximately 4.46 times, below the required debt covenant ratio of 4.75 times. As a reminder, under the terms of our credit agreement, the consolidated debt calculation excludes long-term financing obligations of approximately $85 million.
Our adjusted EBITDA to consolidated interest coverage ratio is approximately 1.86 times above the required ratio of 1.65 times. Our EBITDA is adjusted upward for non-cash compensation expense, as well as any other non-cash charges.
That concludes my financial commentary. I’d now like to turn the conference call back to the operator as we are ready to take questions now.
Thank you. (Operator Instructions) Our first question comes from the line of David Miller with Caris & Company. Please proceed with your question.
David Miller - Caris & Company
Richard, a couple questions, and maybe other members of management can follow up with their own color. When you guys announced back on October 1 the suspension of the $0.70 per share, I had thought at least rhetorically in speaking to you that day that this would be sort of temporary in nature, that it was sort of semi-permanent, and I’m looking at that as kind of semi-permanent and I just want to her your color on that and then I have a follow-up. Thanks.
Sure. As you know, the board decided to suspend the dividend. We had that free up about $8 to $9 million dollars that we historically have had in cash flow to pay down debt. We thought that’s the thing we need to be doing in this credit market.
The dividend historically has been reviewed on a quarterly basis and I’m sure the board will take that under advisement, but at this point in time, we think in the foreseeable future, I think our stockholders should expect a dividend to be suspended.
David Miller – Caris & Company
When you say foreseeable future, can you put any sort of promise or timeline on that?
I really can’t.
David Miller – Caris & Company
That’s fine. Just a follow-up, you guys obviously have the most superior platform out there in terms of digital and 3D. You know, with all the murkiness surrounding DCIP and the timing and whether or not they’re going to get the financing and whether or not JP Morgan is going to find a debt syndicate, you know obviously you guys are just at a huge strategic advantage over the other exhibitors once Bolt rolls out and even quite possibly with Monsters Vs Aliens rolls out. So given that, do you see any additional leverage that you have with the studios on rental fees. Thanks.
Well each studio we have a different deal and absolutely that is true. We have more leverage with 3D than anything else since we make up almost 40% of the market. I think it’s 38%. So yes, we do have a lot of leverage with them and we are applying that leverage.
David Miller – Caris & Company
Our next question comes from the line of James Marsh with Piper Jaffray. Please proceed with your question.
James Marsh - Piper Jaffray
Two quick questions. First on 3D. I was hoping you could elaborate a little bit on your transition from $2 to $2.50. I’m trying to get a sense for what your expectations, you know, the Bolt movie, you won’t get all the way to $2.50, but maybe if you could shed some light on how far you think you could get. And then, related to that, where do you think the cap is for putting on 3D?
Fred Van Noy
This is Fred. I think that our transition from $2 to $2.50 in the past 12 months moved from I think it was somewhere around the 16% that we moved up from $2 to $2.50. We’re now clearly up to 25% of those locations at that level and we’re moving that bar further up with Bolt. So we keep testing the market. We test it on a market-by-market basis and one of the things that we’re doing with Bolt is we’re actually moving a couple of locations to the $3 dollar range just to test the acceptance at that level.
So as we continue to get to these pictures, we feel like we can move the surcharge to a level that helps our ROI on investment in the 3D technology and we continue to look at it from picture-by-picture, market-by-market.
James Marsh - Piper Jaffray
Related to the surplus property proceeds from this year, should we assume something similar for 09 or is it too early to look at that?
I think we did about a $8 to $9 million clip last year and this year we’re looking at a $10 to $12. So we’re going to be shooting for something somewhere to those two years, next year. These properties are in unique markets across the country, but in the current environment, we’ve been able to do $10 to $12 million. So we’re going to press forward next year.
James Marsh - Piper Jaffray
Thanks very much.
Mr. Hare, I’ll now turn the call back to you. Please continue with you presentation or closing remarks.
Well thank you everyone for joining us today and taking the time to participate in our Q3 call. If you have any additional questions, please feel free to contact me, Michael, or Fred here in Columbus or our new Investor Relations firm Jaffoni in New York. We look forward to speaking to you again following our Q4 end results.
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day.
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