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Executives

Robert Rinderman

S. David Passman - Chief Executive Officer, President, Director, Chairman of Executive Committee and Member of Corporate Governance Committee

Richard B. Hare - Chief Financial Officer, Principal Accounting Officer, Senior Vice President of Finance and Treasurer

Analysts

James M. Marsh - Piper Jaffray Companies, Research Division

Eric Wold - B. Riley Caris, Research Division

Joseph D. Hovorka - Raymond James & Associates, Inc., Research Division

John Tinker - Maxim Group LLC, Research Division

Carmike Cinemas (CKEC) Q4 2012 Earnings Call March 14, 2013 5:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Carmike Cinemas 2012 Q4 Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded, Thursday, March 14, 2013.

I would now like to turn the conference call over to Rob Rinderman from Carmike Cinemas, Investor Relations. Please go ahead, sir.

Robert Rinderman

Thank you, Joe. Good afternoon, everyone.

Certain statements by Carmike Cinemas management on today's call may constitute forward-looking statements that are subject to certain 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, 2012 and in other SEC filings. Carmike undertakes no obligation to publicly update or revise any forward-looking statements.

Today's call and webcast may include non-GAAP financial measures. And when required, a reconciliation of all these measures to the most directly comparable financial measure, calculated and then presented in accordance with GAAP, can be found in today's press release and on the company's corporate website.

Carmike Cinemas' President and CEO, David Passman, will now make his opening remarks. David?

S. David Passman

Thank you, Rob, and good afternoon, everyone. We appreciate you joining us on the call today. I'm accompanied by Richard Hare, our Chief Financial Officer; as well as our Chief Operating Officer, Fred Van Noy, who is here to assist us during the Q&A session.

In the fourth quarter of 2012, the industry generated a 16% increase in U.S. box office revenues due to a broad array of well-performing films, a well-balanced release schedule and a relatively less-challenging year-over-year comparison.

The fourth quarter capped an outstanding year with annual box office receipts increasing 6.5%, reaching an all-time record high of $10.8 billion, driven predominantly by attendance gains, as the average ticket price for the 12-month period was only $0.04 higher than in 2011.

Carmike's fourth quarter admissions, concessions and other revenues combined for a healthy 23% increase in Q4 revenues versus the prior year. We were pleased to see the concessions and other sales per patron rose 6% to $3.99. This marks the company's 12th consecutive quarter of concessions and other sales per patron increases.

One of Carmike's key goals is to maintain this positive momentum at the theater level, where we will continue to utilize our most successful concessions promotions in addition to actively experimenting and developing creative new programs.

Average fourth quarter admissions per patron increased 5%, primarily due to there being fewer family-oriented titles and release, as well as nominal ticket price increases. In aggregate, 2012 fourth quarter per patron spending rose to a record $11.09 compared to $10.53 in the 2011 fourth quarter.

Total attendance in Q4 increased approximately 16%, and average attendance per screen increased 9%. We believe Carmike's company-wide emphasis in recent years on providing our cinema-going patrons with excellent customer service to ensure a consistently, enjoyable experience at each of our theaters will continue to foster loyalty and earn repeat business from our valued guests.

Now taking a look at the Q4 film slate performance. Top industry performers during the quarter, included Skyfall, The Twilight Saga, The Hobbit, each generating in excess of $200 million at the box office. Other strong Q4 successes were Wreck-It Ralph, Taken 2, Lincoln, Hotel Transylvania and Argo, with each grossing over $100 million. A few other noteworthy titles from Q4 included Flight, Rise Of The Guardians, Life of Pi, Les Mis and Django Unchained.

Carmike circuits slightly over indexed on 2 successful releases during the period, The Twilight Saga and Taken 2, which seemed to resonate well in our hometown markets compared to other notable Q4 releases such as Skyfall, Argo and Life of Pi, where we under indexed, as we expected.

As widely reported, Q1 2013 has been facing difficult comparisons to the year-ago quarter. However, we're pleased with the performance of Oz the Great and Powerful and Identity Thief and look forward to the opening up G.I. Joe: Retaliation at the end of this month.

Now taking a deeper look at the 2013 calendar. We're optimistic about a number of the upcoming titles starting with Q2 releases: Iron Man 3, The Great Gatsby, Star Trek Into Darkness, Man of Steel and Monsters University, all of which will be available in 3D format. Of note, Gatsby is breaking new ground on the 3D front as a rare drama that is being released in 3D, and we're looking forward to seeing how it plays.

A few of the potential tentpole films among many high-profile movies slated for release in the back half of 2013 include 3D titles such as Pacific Rim, The Wolverine, Smurfs 2, Thor and Hobbit. 2D movies that also make the list of potential 2013 tentpoles include, of course, The Hunger Games: Catching Fire, The Lone Ranger and Ender's Game.

Before I turn the call over to Richard, I wanted to spend a few minutes discussing some of the key events and successes Carmike achieved in 2012. For those of you that have been following our company, you know that around this time last year, we reported achieving an important milestone of lowering Carmike's bank term debt to $200 million by utilizing the majority of our free cash flow to delever and further strengthen the balance sheet over the preceding few years.

With our capital structure in much better shape, we completed 2 key objectives during the first half of 2012: First, in April, we issued 4.6 million shares of common stock to the public, raising approximately $56 million net of transaction costs, which both increased the company's tradable float and provided additional capital for acquisitions, new builds and other CapEx, such as improvements to our circuit. Second, also in April, the company completed an offering of $210 million senior secured notes due in 2019. The proceeds of which were used to retire our existing term loan.

Carmike simultaneously entered into a new $25-million revolving credit facility, which has remained undrawn through year end. The refinancing of our existing indebtedness gave us greater flexibility to make acquisitions and more effectively utilize excess cash flow generated by the business. With more financial flexibility and having successfully completed an operational and corporate culture turnaround focused on customer service excellence, our Board and senior management team elected to embark on a growth strategy.

We initiated the target of expanding Carmike's circuit to approximately 300 locations and 3,000 screens, both through organic and acquisitive growth.

In September, Carmike announced the planned acquisition of 16 state-of-the-art theaters with an aggregate of 251 screens from Rave Reviews Cinemas. The Rave transaction was an important event for Carmike, increasing our screen count by approximately 11%, while adding $22 million of annual adjusted EBITDA on a pro forma basis.

We also made 2 separate smaller acquisitions in 2012, adding 3 theaters in Pennsylvania, Kentucky and Tennessee. All 3 of these purchases represent an ideal complement to our existing footprint in terms of geographic fit, market size and asset quality.

In addition to our focus on securing acquisitions, we continue to close underperforming theaters and exit unprofitable leases. In the 2012 calendar year, we closed 11 theaters with an aggregate of 75 screens. Carmike also has an active building program in place, as we opened 4 new theaters with 48 screens last year.

In addition, we unveiled a Big D-Large Format auditorium at our Broadway 17 in Myrtle Beach, South Carolina on the site of a previous stand-alone IMAX screen. Our current expectation is that we will open 5 additional theaters during calendar '13 with a total of 60 screens. These new entertainment complexes are expected to open in Sandestin, Florida, which will be the site of our second Ovation VIP auditorium to cater in Opelika, Alabama, Winchester, Virginia and Champaign, Illinois.

While we don't usually devote much time discussing non-operating items, this will be an exception, in part due to its significance and in part due to its linkage to operations. Several years ago, with a poor track record compared to the industry, as well as our historical performance levels, the company set up a full valuation allowance against our deferred tax asset balance. The allowance was a significant charge to earnings. But more importantly, it was an indication of the uncertainty of Carmike's ability to generate future income. That was but 1 sign of a company in serious distress.

We began a journey in 2009 to restore Carmike to its glory, to improve our credibility with our patrons, our associates, our stockholders and with Hollywood. Fast forward to 2012 and every area of the company is performing better. At this point, we don't often experience negative surprises financially, operationally or relationally. Our financial results, including operational successes, as well as the shoring up of our capital structure with debt pay-downs, refinancing and an equity offering have taken us from an uncertain and foreboding future of just a few years ago to one where now many companies aspire to be.

While recent successes certainly don't guarantee the future to be bright or profitable, they nevertheless helped establish a pattern or trend line of financial stability. As was the negative implications of setting up the allowance with a charge to earnings some years ago, so is the positive indication of taking the allowance back into income in 2012. We think it is but one more sign that Carmike has recovered.

Let me conclude my remarks with one final thought. Our Board, management team and I believe that we have ample liquidity and financial flexibility to facilitate our strategic growth initiatives. Under our present expansion plans and pursuant to our operating strategy, we expect to continue our management and spending disciplines, keeping corporate overhead reasonably steady at present levels, while targeting both top and bottom line performance enhancements, as our circuit heads toward the 300 location, 3,000 screen targets.

In the current environment, we believe there are further opportunities to optimize our portfolio through selective acquisitions to further enhance long-term value for our stakeholders. I believe that we have successfully refined our operating and financial focus over the past several years. And while it took time for Carmike to transition from a fix-it to a grow-it strategy, we believe that our operating performance, combined with the key 2012 events I outlined, underscored that we are on the right path to further expanding our equity market cap and overall enterprise value.

Richard?

Richard B. Hare

Thank you, David, and good afternoon. As of December 31, 2012, Carmike's circuit consisted of 249 theaters, with 2,502 screens across 35 states. We ended the quarter with 23 Large Format auditoriums, including 16 Big D auditoriums and 7 IMAX screens, which were acquired from Rave. There are 855 3D-compatible screens in our circuit, representing 36% of our total digital footprint. Keep in mind that our Q4 2012 results only include the Rave assets for the approximate 6.5-week period from the November 15 acquisition closing date to December 31.

It's worth noting that back in Q4 of 2011, while U.S. box office admissions for the overall industry declined approximately 5% year-over-year, Carmike's admissions revenue declined only 1%, leading to a 400 basis point industry outperformance. Despite this elevated hurdle, our Q4 2012 box office revenues increased 22.6% year-over-year to $93.7 million, including $9.2 million from acquired Rave dealers and rose 15.5% on a per screen basis.

Carmike's premium and 3D revenue represented 12.6% of total box office receipts generated in the quarter, an increase of 200 basis points versus the 2011 fourth quarter level, resulting from an increase in Large Format auditoriums compared to the year-ago quarter.

Concessions and other revenue increased to $52.9 million in Q4 2012, a 24.3% increase over Q4 2011. Concessions and other revenue from acquired Rave theaters totaled $4.6 million during the quarter. Total revenues for Q4 2012 increased 23.2% from the year-earlier period to $146.6 million.

Turning now to our expenses. Q4 film exhibition costs were $50.5 million, representing 53.8% of admissions revenue, compared to Q4 2011 cost of $40.8 million or 53.5% of admissions revenue. The film exhibition costs attributable to acquired Rave theaters were $5 million during the quarter. The slight year-over-year increase in the margin was relatively modest, given the strong industry performance throughout the fourth quarter.

Concession costs, as a percent of concession and other revenue, were 12.2% compared to 11.5% in the year-earlier quarter due primarily to slightly higher inventory and procurement costs associated with acquired Rave inventory.

Carmike's Q4 2002 other theater operating costs were $54.1 million, representing just 36.9% of total revenues compared to other theater operating cost in Q4 2011 of $48.9 million, which was 41.1% of total revenues. The significant year-over-year decrease of approximately 420 basis points in this metric demonstrates Carmike's ability to derive meaningful operating leverage from our current cost structure.

G&A expenses for the quarter were $8.6 million, up from the $5.4 million level in the prior-year period, primarily due to an increase in professional fees and other costs related to our active merger and acquisition program, which included the recent Rave transaction.

As expected, interest expense expanded to $10.5 million, up from the $8.3 million in the year-ago quarter due to a combination of our assumption of long-term capital lease obligations associated with the additional Rave theaters, as well as higher fixed quarterly interest charges on the $210 million 7-year senior secured notes issued last April. Going forward, we expect interest expense to continue at a quarterly run rate of approximately $12 million or $48 million annually.

Depreciation and amortization expense increased by $1.1 million due primarily to assets acquired from Rave. We recorded impairment charges of $900,000 in Q4 2012 compared to impairment charges of $2.1 million in Q4 of 2011.

Carmike's Q4 operating income grew significantly to $16.7 million versus $8.3 million in the year-earlier period. While Q4 2012 benefited from a strong industry performance versus the prior year, we believe the company's noteworthy operating results also demonstrate our organization's ability to manage the cost line by delivering high-quality customer experience at each of our theaters.

In Q4, we recorded income from unconsolidated affiliates of $246,000 with the majority attributable to our Screenvision profits interest. Each quarter, we record Carmike's income or loss from Screenvision equal to our nonforfeitable ownership percentage, which approximates 15%. We also reclassified a portion of the advertising revenue we receive from Screenvision to earnings from unconsolidated affiliates.

Our Q4 and full year net income and EPS positively benefited from a significant $86.5 million valuation allowance reversal of the company's deferred tax assets at December 31, 2012. This adjustment was made after the company determined according to accounting standards they would be able to use these deferred tax assets to offset future taxable income. We believe this reversal further underscores Carmike's positive operational and financial turnaround over the last few years.

That said, Carmike's 2012 Q4 reported net income was $91.6 million or $5.19 per diluted share, accounting for severance, acquisition-related expenses, loss on sale of property and equipment, impairment charges, and the tax effect of adjustments to net income. Carmike's adjusted net income per diluted share amounted to $0.43 during the 3-month period.

Fourth quarter theater level cash flow and adjusted EBITDA to non-GAAP measures that are widely followed metrics of an exhibitor's operating efficiency were $35.6 million and $30.2 million, respectively. On a trailing 12-month basis, Carmike generated $118 million of theater level cash flow and approximately $97.9 million of adjusted EBITDA.

The company's Q4 capital expenditures were $9.1 million, and full year capital expenditures were $35.1 million. We anticipate full year 2013 CapEx in the range of $25 million to $30 million, of which approximately $7 million to $8 million represents maintenance capital.

Looking at the balance sheet, the cash and cash equivalent balance at quarter end was $68.5 million, up significantly from the $13.6 million level at the end of 2011. This balance includes net proceeds of approximately $56 million that we raised and Carmike's 4.6 million share offering completed last April. You will recall that we also deployed approximately $22 million of cash, inclusive of working capital adjustments, on acquiring the Rave assets.

Carmike's net debt level at December 31 was $366.2 million, reflecting an aggregate of capital leases and long-term financing obligations plus our senior notes versus $301.8 million on December 31, 2011.

Total debt outstanding at quarter end, including our capital lease and long-term financing obligations, was $434.7 million. As previously disclosed, we sold $210 million of senior secured notes with a 7 3/8 [ph] coupon due 2019 and a private debt offering in April of 2012. We also will have an untapped $25-million revolving credit facility.

In closing, we are extremely pleased with Carmike's 2012 fourth quarter and full-year results, and we're looking forward to what we hope will be another solid year in 2013 as we continue expanding our theater circuit through accretive acquisitions and additional new locations through our build-to-suit [ph] arrangements with leading developers and move closer to our target of 3,000 screens at 300 theaters.

Operator, at this time, we would like to open up the call for question and answer period.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of James Marsh with Piper Jaffray.

James M. Marsh - Piper Jaffray Companies, Research Division

Just 2 quick questions. First one is for you, Richard. If you could just circle back on that other theater operating costs that came down. It's about 400 plus basis points in the quarter. Would that 37% number be sustainable for 2013, in your opinion? And then, just the second question, little less [indiscernible] to answer it, as you look at that first quarter release schedule, are there any films in particular that you think that over or under indexed in your market?

Richard B. Hare

Sure. On the operating cost side for the quarter, I'd say that included $4 million for Rave. And so, I think if you look at our theater costs quarter-over-quarter and then throw in the $4 million, I think 70% to 80% of our costs are fixed. So I think the percentage is going to depend on the box office. But I think we've got a pretty good consistent pattern of fairly stable cost structure.

S. David Passman

And, James, on that question of upcoming films, how are we going to do. Was that specific to the second quarter, first quarter or the year?

James M. Marsh - Piper Jaffray Companies, Research Division

Yes. That's just for the first quarter. I was just thinking, which ones would play particularly well or not so well in your markets?

S. David Passman

Yes. I think, on average, we pretty much are at the market on virtually everything in the first quarter. We're slight under indexing and we're slight over indexing, but nothing material.

Operator

Our next question comes from the line of Eric Wold with B. Riley.

Eric Wold - B. Riley Caris, Research Division

Just a couple of questions. One, I know that the G&A costs are inflated because of some of the, kind of, the professional fees from the ongoing M&A. How much of that should we consider to be kind of specific in accordance to Rave? And I know you're continuing to be ongoing with M&A. So what should be -- so maybe a reasonable run rate throughout '13?

Richard B. Hare

Yes. I would say just about all of those expenses in Q -- in the quarter with the exception of maybe $0.5 million related specifically to Rave. On a going forward basis, it's very difficult to forecast that number quite frankly. It's included investment banking fees, accountants, lawyers, et cetera. So -- but in terms of looking at the, I think, the $3.2 million increase. It's basically all, but a small amount related to Rave.

Eric Wold - B. Riley Caris, Research Division

Okay. And then on Q1, obviously, numbers have been tough -- tough comparison, a couple of movies underperforming. There's a lot of speculation in the market about consumer spending in general. Anything you've seen in your market, specifically, that would point to the weakness being anything but just the tough comp and some upcoming slates [ph]?

S. David Passman

No, not really Eric. We tend to be more influenced by gasoline prices than any single factor that it's any single external factor as do fast foods. And gas prices, as you know, kind of spiked up in the first quarter, but they seem to be settling now. So we're actually fairly optimistic moving forward.

Operator

[Operator Instructions] Our next question comes from the line of Joe Hovorka with Raymond James.

Joseph D. Hovorka - Raymond James & Associates, Inc., Research Division

2 questions, one on the deferred tax assets. If I recall back in 2008, I think it was you had a Section 382 limitation on what you could use. Has that changed, or is this something different?

Richard B. Hare

This is something different. The Section 382 hasn't changed. We're still limited in the amount of the NOLs we can utilize on an annual basis. This is something that's related back in 2007, we wrote off our deferred tax asset because the company was experiencing a lot of net losses and deteriorating operating performance. But over the last 3 years, we've made significant operational and financial improvements, Joe. We've been generating positive income. We think it's going to continue over the longer-term. So we evaluated the evidence according to account. We've got positive pre-tax book income. We have a trend of improving strong earnings. We have accretive acquisitions, successful new build program. And the time is right to put it back on the book, so to speak.

Joseph D. Hovorka - Raymond James & Associates, Inc., Research Division

Okay. So there's no limitation...

S. David Passman

I'm sorry, Joe. I was just going to add to that, that the NOL -- the benefit from NOLs is but a fraction of the total deferred tax asset.

Joseph D. Hovorka - Raymond James & Associates, Inc., Research Division

Okay. Great. I just want to make sure that nothing changed from -- the other question.

S. David Passman

I think we're still limited to about $2 million.

Richard B. Hare

Yes. $1.7 million -- we're limited to $1.7 million a year on that.

Joseph D. Hovorka - Raymond James & Associates, Inc., Research Division

Okay. All right. And then, the -- did you mention your Screenvision ownership is 15%?

Richard B. Hare

We mentioned that we booked the nonprofitable fees, which is 15%. If you recall, we have almost 20% interest, but the nonprofitable piece is 15%.

Operator

Our next question comes from the line of John Tinker with Maxim.

John Tinker - Maxim Group LLC, Research Division

This is a more general question. Are you hearing of any changes coming out of the studios on the timing of windows or more experimental releases to compensate Comcast, whose main business is cable, pay-per-view and screening now control the company [ph] -- Universal.

Richard B. Hare

Right...

John Tinker - Maxim Group LLC, Research Division

How do you think it's pretty steady state at the moment?

S. David Passman

At the moment, John, it's pretty steady state with one minor exception that I'm sure you're aware off, and that is that there's been some experimentation not with the shrinking of the theatrical window, but adding a new window on the home side instead of releasing streaming DoD and DVDs all on the same date. They have pushed back the DVD, the physical product sales to generate, hopefully, some streaming income a week or 2 or 3 ahead of the physical product sales. And I believe Fox Studios was the first want to do that, and they had pretty good results the first time they tried it. And I think it was with Prometheus. But no significant movement, one way or the other, in terms of the theatrical window.

John Tinker - Maxim Group LLC, Research Division

And just another general, so where do you stand with IMAX now?

S. David Passman

Well, we have 7 IMAX theaters. So we're an important part of theirs, and they obviously would be an important partner of ours. We still are pursuing our Big D strategy, especially on new builds. But we, at least, now have a dialogue with IMAX. And would that, if you will, assumed a partnership, we're very excited about the potential. But we have nothing to announce and have no discussions or negotiations going on for any kind of rollout imminently.

Operator

There are no further questions at this time. I'll turn the call back to you for your concluding remarks.

S. David Passman

Thank you very much, operator. And ladies and gentlemen, thank you, again, for joining in. We look forward to reporting Q1 results with you in the near-term. Have a good evening.

Operator

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.

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