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Executives

Amy E. Miles - Chief Executive Officer and Director

David H. Ownby - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Analysts

Townsend Buckles - JP Morgan Chase & Co, Research Division

Eric O. Handler - MKM Partners LLC, Research Division

Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division

James M. Marsh - Piper Jaffray Companies, Research Division

Ryan Fiftal - Morgan Stanley, Research Division

Tuna N. Amobi - S&P Capital IQ Equity Research

Robert Fishman

James C. Goss - Barrington Research Associates, Inc., Research Division

Murali Sankar - Janney Montgomery Scott LLC, Research Division

Matthew J. Harrigan - Wunderlich Securities Inc., Research Division

Regal Entertainment Group (RGC) Q3 2013 Earnings Call October 24, 2013 4:30 PM ET

Operator

At this time, I would like to welcome everyone to the Regal Entertainment Group Fiscal Third Quarter 2013 Earnings Release Conference Call, with our hosts Amy Miles, Chief Executive Officer of Regal Entertainment Group; and David Ownby, Chief Financial Officer of Regal Entertainment Group. [Operator Instructions]

I would like to remind our listeners that this conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

All statements, other than statements of historical facts communicated during this conference call may constitute forward-looking statements. These forward-looking statements involve risks and uncertainties. Important factors that can cause actual results to differ materially from the company's expectations are disclosed in the risk factors contained in the company's Annual Report on Form 10-K, dated February 25, 2013. All forward-looking statements are expressly qualified in their entirety by such factors.

Now I will turn the call over to Amy Miles.

Amy E. Miles

Good afternoon, and thank you for dialing into our third quarter conference call. Those of you who listened to our last earnings call a few months ago will likely notice a similar message today. The factors that drove our success in the second quarter -- a healthy box office environment, the impact of our recent acquisitions, and focus on managing the variable portion of our cost structure -- were again present in the third quarter and enabled us to generate adjusted EBITDA of almost $180 million for the second consecutive quarter and our highest quarterly adjustment earnings per share in almost 10 years. And for the first time in our history, we are reporting trailing 12-month total revenue as over $3 billion, and trailing 12-month adjusted EBITDA in excess of $620 million. Industry box office receipts for our third fiscal quarter increased approximately 8% versus the same fiscal period last year. In the past, we've noticed that a well-balanced and well-spaced film slate can often be a powerful driver of box office results, and that was clearly the case this quarter with summer action movies, animated film titles, and R-rated comedies all contributing to box office gross.

In total, 19 films released during the quarter went on to gross over $50 million, as compared to only $16 million in the same period last year, and helped generate record third quarter industry box office revenue of almost $3 billion. As we look back at the summer box office season, it is also worth noting that industry box office revenue for the 4-month period from May through August exceeded $4.7 billion, almost 10% ahead of last year's total and 5.5% better than the previous record, which was set in summer of 2011. And despite difficult comparisons in recent weeks with last year's record October, year-to-date industry box office revenue of over $8.8 billion is approximately 1.5% ahead of last year's record-setting total. In addition to the healthy box office environment, our recent acquisitions contributed -- continue to benefit our financial results in the third quarter. The combined impact of the industry box office increase and our acquisition of over 800 screens in the last 12 months led to $120 million increase in our total revenue and, as I mentioned earlier, pushed our total revenue over the $3 billion mark for the trailing 12 months for the first time in our history.

As we consider potential uses of cash and financial flexibility, we continue to believe that strategic acquisitions at accretive multiples are a great way to deliver ongoing shareholder value, and we remain optimistic regarding the potential for further industry consolidation. From an operational standpoint, our field personnel's ability to provide a great customer experience, while keeping a close watch on our cost structure, was again a key part of our success. That's at both our existing locations and our newly acquired locations. Their attention to detail, combined with the increase in industry box office revenue, helped us achieve adjusted EBITDA of over $177 million. That's just shy of the record that we set last quarter, an adjusted EBITDA margin of about 22%.

David will provide more details behind our operating results later in the call. But I think it goes without saying that we are extremely pleased with our operational execution in our third quarter financial results.

In previous quarters, we've outlined our efforts to bring a premium experience to a larger portion of our customer base. We remain encouraged by the returns generated to date by our investments in the premium experience. And today, we'll take a few moments to provide investors with a look ahead at our plans for the remainder of this year and into 2014.

First and foremost, we expect our premium large format screen base to continue to grow. By the end of this year, we expect to operate over 140 premium screens, with another 25 to 30 on the way in 2014. The product-driven success of our IMAX screens combined with the operational flexibility of our RPX screens allow us to offer a premium auditorium in almost all of our major markets, every week of the year. And we are excited about the opportunity to add premium screens at key locations, including some of our newly built and newly acquired theaters in the near future.

Our expanded food menu continues to gain traction with customers and accounted for over half a penny of the $0.09 increase in our concession per cap this quarter. The success of the new menu, combined with continued increases in the demand for our core concession products helped us achieve a third quarter concession per cap of $3.59, the second highest quarterly total in our history. In the coming year, we expect to introduce the expanded menu at additional 30 locations, bringing the total count to approximately 175 theaters. In combination with these ongoing initiatives, our management team has also been busy evaluating new concepts, including VIP auditoriums at traditional theaters, smaller footprint theaters with luxury amenities, the installation of reclining seats in existing theaters, and alcoholic beverage offerings, all of which we plan to implement or experiment with in the next 12 to 18 months. We are obviously pleased with the incremental revenue and returns from our investment in the premium experience and expect these programs to benefit our results in the years ahead.

And lastly, for the box office environment, last year's holiday box office provided a great end to fiscal 2012, and the film slate for the upcoming fourth quarter has the potential to do the same for 2013. As was the case last year, the slate is anchored by 3 high-profile pictures, well-spaced throughout the quarter: Thor, The Dark World; The Hunger Games: Catching Fire; and the second chapter of Peter Jackson's The Hobbit; surrounded by films for the family, comedy and adult drama audiences. With these factors in mind, we are optimistic regarding the box office potential success for the remainder of 2013.

In summary, we are again pleased that a healthy box office environment, combined with our recent acquisitions and our operational execution, enabled us to achieve record results in our third quarter. I would now like to turn the presentation over to David for a discussion of our financial performance.

David H. Ownby

Thanks, Amy, and good afternoon, everyone. Today I'll provide some additional analysis of our third quarter results and an update with respect to our balance sheet and asset base. For our fiscal third quarter, we generated total revenues of $813.1 million, including $548.4 million of box office revenue, $224.1 million of concession sales and $40.6 million of other operating revenues.

As with the case in the second quarter, our recent acquisitions had a significant positive impact on our market share in the third quarter, as our box office revenue grew by over 16% in the aggregate as compared to an 8% increase for the industry. The increase was largely driven by attendance growth at existing locations and as a result of our newly acquired screens, as the decline in the percentage of our revenue generated by premium ticket sales and slightly lower ticket prices at the acquired locations put downward pressure on our average ticket price, which remains flat with the same period last year at $8.79.

Our concession revenue increased by 19.6% in the aggregate and by $0.09 or 2.6% on a per-attendee basis. Strategic price increases, improvements in popcorn and beverage volume, a family-friendly film slate, and the continued success of our expanded food menu all contributed to the increase and helped drive per cap growth of over 2.5% for the ninth consecutive quarter. Other operating revenues increased $6 million as compared to the same period last year, as revenues from National CineMedia, our vendor marketing programs and our advanced ticket programs all benefited from increased attendance during the quarter.

While we are always pleased to see improvements in the top line, it is incumbent on our management team and field personnel to make sure increased revenue translates into increased adjusted EBITDA and free cash flow, particularly, as we integrate acquired screens into our existing circuit.

Once again, we were extremely pleased with our operational execution during the third quarter. Our film and advertising expense of $286.6 million represented 52.3% of admissions revenue, an improvement of 30 basis points as compared to the same period last year and slightly below our historical third quarter average. A film slate that relied on a breadth of films as opposed to a few high-grossing titles was the primary driver of the improvement in our film and advertising costs. Our 86.4% concession margin remained flat with the same period last year as minor increases in raw material costs were largely offset by an increase in the amount of vendor marketing revenue recorded as a reduction of cost of concession.

Total rent expense of $105.7 million increased 10.2% in aggregate, due primarily to the additional rent associated with the newly acquired Great Escape and Hollywood screens. On a per-screen basis, our rent expense declined by approximately 1.1% as compared with the same period last year due to slightly lower rent amounts associated with the acquired theaters.

And as Amy mentioned earlier, our field personnel's focus on cost control continued to have a positive impact on our operating results. Total other operating expenses of $208.7 million increased by 12.7% in the aggregate due primarily to the cost associated with the newly acquired screens, but increased only slightly on a per-screen basis as compared to the third quarter of last-year. Once again, our field personnel's ability to control variable costs while still delivering a great customer experience and a meaningful increase in our concession per caps was a key driver of our success in the third quarter. We are extremely pleased that a healthy box office environment, our recent acquisitions and our operational execution all had a positive impact on our third quarter financial results, and enabled us to generate total revenue, adjusted EBITDA and adjusted earnings per share that were well ahead of consensus Wall Street estimates.

As for our asset base and our balance sheet, capital expenditures net of assets sales for the quarter totaled $18.9 million. And we continue to actively manage our asset base, opening 1 theater with 12 screens, and closing 3 theaters with 21 screens to end the quarter with 575 theaters and 7,334 screens. Based on our development schedule for the remainder of 2013, we now expect full-year capital expenditures to be between $95 million and $105 million. In the fourth quarter, we expect to open 6 new built theaters with 80 screens, and close 1 to 3 theaters with 20 to 30 screens, which would result in ending counts of approximately 579 theaters and 7,389 screens for 2013.

We also want to remind investors that our recent acquisitions have had a significant impact on our stake in National CineMedia. Earlier this year, we received an additional 2.2 million units of NCM related to our Great Escape acquisition. And by year end, we expect to receive approximately 3.3 million units as a result of the Hollywood acquisitions, both in accordance with the common unit provisions of our agreement with NCM.

In early September, we monetized 2.3 million NCM shares in a secondary offering valued at just under $41 million and recorded a gain on the transaction of just under $31 million. The proceeds from the sale will be used to fund the current taxes due on the shares received in 2013, and we expect to end the year with over 25 million shares of National CineMedia. With respect to the balance sheet, we ended the quarter with $270 million in cash and a total debt balance of approximately $2.3 billion. The recent growth in our adjusted EBITDA has had a positive impact on our leverage calculation. And as of the end of the quarter, our overall leverage ratio was 3.2x, pro forma for the Great Escape and Hollywood acquisitions.

In closing, we are extremely pleased with our recent strategic and operational execution, and we remain optimistic regarding the potential for box office success in the upcoming holiday movie season. This concludes our prepared remarks. And we will now open the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Townsend Buckles with JPMorgan.

Townsend Buckles - JP Morgan Chase & Co, Research Division

David, looking at the box office performance on a per-screen basis, still clearly a lag to the industry which you've talked about before with the new circuits, but also about 150 basis points of growth stronger than last quarter. So wondering was your organic performance better in Q3 or anything else that you saw moving the needle there?

David H. Ownby

Yes, on a -- if you just take the acquisitions out and look at it more on a same-store basis, Townsend, we were actually up a little bit ahead of the industry. Couple of things maybe have played out. I think if you look back at Q3 of last year, we were a little bit behind the industry, so some of that is just relative to last year we did a little bit better. We continued to be pleased with how some of our RPX screens are doing as well, so I think that's helping that metric a little bit. But all in all, I think we were, give or take, on a same-store basis, about 50 or 60 basis points ahead of the industry.

Townsend Buckles - JP Morgan Chase & Co, Research Division

Got it. And could you talk a bit about your Premium and RPX performance for Gravity. Obviously your IMAX screens are doing very well. But if you can maybe give an overall figure of how much the movie has done for you in the Premium format here.

David H. Ownby

Yes, we really don't talk about individual titles and the results of those individual titles in total or in any particular format, Townsend, but I think it's safe to say, given that we continue to plan to roll those out into 2014, that we've been very pleased with the results of RPX screens so far.

Townsend Buckles - JP Morgan Chase & Co, Research Division

Anything different that you're seeing between the IMAX and the RPX performance for you?

Amy E. Miles

Gravity is a film you've seen [ph] the IMAX number, so that was very strong from an IMAX perspective. So we were very pleased in a lot of our key locations. Where we have the IMAX format, we had -- you would expect that we would have strong performance. So again, we won't kind of differentiate between the 2 formats, but I can tell you we were very pleased with those.

Operator

Our next question comes from the line of Eric Handler of MKM Partners.

Eric O. Handler - MKM Partners LLC, Research Division

I saw in the press a couple of days that the DCDC initiative has gotten off the ground. When you look at -- it looks like your deals with National CineMedia for the Fathom business, I imagine, should be closing soon. One, do you think about combining those 2 businesses and sort of make it a larger type of business? And two, how should we start thinking about those businesses from an income statement perspective?

Amy E. Miles

I think the best way to think about DCDC is from a physical delivery perspective. It's really going to improve the opportunity on the alternative content side. So I wouldn't necessarily think of it as a combined business, but DCDC being the right delivery platform to help grow and expand Fathom. And so from that perspective, it takes some of the constraints from a delivery perspective out of the model. So I think it does enhance the opportunity for growth and alternative content.

David H. Ownby

And as for the income statement presentations, Eric, DCDC, we've made a very, very small equity contribution there. We'll account for that on the equity method. I wouldn't expect that to be material to the P&L any time soon or really in the future at all. And as for Fathom, that deal actually hasn't closed yet, so I can't really speak yet to what the specific financial arrangement is there. But again in the near term, I wouldn't expect it to have a big impact on the P&L.

Eric O. Handler - MKM Partners LLC, Research Division

And just one other follow-up question. As you start planning for next year, any thoughts on planned openings of theaters versus how many might shutter?

David H. Ownby

Yes, I would think, Eric, you would -- those numbers would look similar probably to this year. We'll give some more specific guidance as we get toward the end of the year, maybe on the fourth quarter call. But in round numbers, I think next year probably looks a lot like this year.

Operator

Our next question is from the line of Ben Mogil of Stifel.

Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division

The 50 basis points increase that you mentioned about the benchmark, was that for the legacy Regal screens only or did you see a similar trajectory for the Great Escapes and Hollywood screens as well?

David H. Ownby

Yes. That -- I was speaking at their boards, specifically, to just -- for the kind of same store Regal number. I think if you look at the Great Escape and Hollywood screens together, they were more in line with the industry on a pro forma basis.

Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division

So your net number, because obviously [indiscernible] what you have for legacy screens would still be above the benchmark as you [indiscernible]?

David H. Ownby

Yes, that's right.

Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division

On the M&A front, when you look at the targets that are out there, is what's driving or what will continue to drive M&A the digital rollup or the availability of build capital? And how concerned are you -- we've seen the DOJ be a little bit more active on files? And I think previously how concerned are you about that effectively?

David H. Ownby

Ben, it's always hard to know exactly what motivates sellers because each one is different. I think maybe more than anything, what you've seen here recently is that we just had a good box office tailwind. And so for that, what's always seen historically over time is that really has motivated sellers, maybe as much as anything because we tend to do deals in our industry off of a trailing 12 top number. And I think Amy is going to speak to the DOJ.

Amy E. Miles

Yes, I think what we would say there is we've obviously worked with the DOJ on a -- let's call it, since we've been pubic, a 10-year period. And we don't anticipate or expect that the environment today is any different than it has been for us over that past 10-year period when we've been able to close, close to 12 to 15 transactions.

Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division

Okay, that's great. And then last question, [indiscernible] I should try to stop. On the cash balance side, is sort of 2x the dividend payment the cash balance number that you're targeting and about that depending on M&A or not? As we think about some capital returns, is 2x still the right number?

David H. Ownby

Well, I think -- we've always said before, Ben, and again this is not our policy -- it's just been our practice to kind of keep a year's worth of dividends on the balance sheet. I think we've been pretty vocal about the fact that we believe the best use of our cash is to continue to do accretive acquisitions. And to the extent we can find those, we'll certainly look to continue to do that. Obviously, if our view about the acquisition landscape changes, then we have other options for that cash.

Operator

Our next question comes from the line of James Marsh with Piper Jaffray.

James M. Marsh - Piper Jaffray Companies, Research Division

Two quick questions here. First, I was hoping you could elaborate a little bit on the VIP beverage recliner initiative. I think you mentioned you're going to experiment over the next 12 to 18 months. How many locations would you envision kind of experimenting with? And what would be the kind of ballpark CapEx or incremental costs associated with that? And then just a quick follow-up is you're discussing large formats for next year, and I think Amy has said, maybe 25 to 30 in 2014. I was just hoping to get a sense for which -- what number of those would be IMAX and what number would be RPX?

Amy E. Miles

Okay, James, we'll try to get the [indiscernible] of your question.

David H. Ownby

I'll take the numbers-oriented part there. I think from the 25 to 30, James, I think we expect to have 82 IMAXs by the end of the year. And so that would leave 7 more on our agreement post 2013. So you if you think about it, probably somewhere between 5 and 7 of those 25 to 30 would be IMAX and the remainder would be RPX. And then, I'll let Amy talk about the kind of some of the specific -- how we're thinking about some of these different formats. But in general, I think we don't view it as being materially moving our CapEx number. It may be a decision for example to build one last new build theater and do some of these new concepts. And we'll make that decisions solely based on whether we think we can get the best return.

Amy E. Miles

And we announced today that we were opening one of our VIP auditoriums in Atlanta. So that was our first announcement with respect to VIP auditoriums. And what we're doing is looking throughout our existing theater base, where we have some great theaters and great locations to see where we could expand that concept. I won't put a number to that today, James, but as David said, it won't have a material impact on CapEx. From a recliner-seating perspective, you could expect us to open probably somewhere around 20 or 25 locations. When I say open, I mean, retrofit or convert 25 -- 20 to 25 existing locations next year with respect to seating. But I think the message here is, strategically, we want to make sure that we are offering our customers a premium moviegoing experience. And tactically, we're going to looking at a lot of different ways to do that in the future. And we're going to be smart about that CapEx, and we're going to be smart about the returns.

Operator

Our next question is from the line of Ben Swinburne with Morgan Stanley.

Ryan Fiftal - Morgan Stanley, Research Division

Good afternoon. It's Ryan Fiftal for Ben. I really just have one housekeeping question, and I apologize if I missed it in the prepared remarks. But did you give a number for the dilution to ticket pricing coming out of your M&A transactions?

David H. Ownby

I didn't, Ryan. I'm happy to walk through that with you. We have several moving parts in our average ticket price this particular quarter. Like we said, it's flat on an overall basis. If you kind of just start stripping things out of that, we've talked about before that the 800 or so screens that we acquired are in smaller markets and have slightly smaller ticket prices. We also had a little bit weaker quarter this quarter from a premium perspective, so that put some downward pressure on the ticket price. And then -- this is the smaller piece of it. But we also had a -- we sold a few more kid and matinee tickets this quarter than we did in Q3 of last year. Two of the top 3 films for the quarter were Monsters University and Despicable Me 2. So that contributed to the downward pressure on the ticket price as well. If you put all that together, on a same-store basis, so if you just strip out the acquisition and look at the legacy Regal theaters, our average ticket price was up about 1% in total. And if you strip it further down and say just look at the same-store 2D price, it was actually up about 2.9%.

Operator

Our next question is coming from the line of Tuna Amobi with S&P Capital.

Tuna N. Amobi - S&P Capital IQ Equity Research

Amy, I'm sorry I missed your -- the comment you made about the 175 locations for expanded menu. Over what timeframe did you mention on that?

Amy E. Miles

We should be at that number somewhere by middle to end of 2014.

Tuna N. Amobi - S&P Capital IQ Equity Research

Okay, that's helpful. Are you able to provide an update as to how that is impacting your concession traffic at this point? Is that something that you're tracking?

David H. Ownby

Yes. We talked about it, Tuna, just in terms of the per cap. And if you go back, we've kind of slowly rolled that out over the last year, maybe a little more than that. And every quarter, it's net -- even though it's been in a small number of theaters, every quarter, it's added about -- between $0.005 and $0.01 to the per cap for the last 4 or 5 quarters.

Tuna N. Amobi - S&P Capital IQ Equity Research

No, I got that. I was just trying to figure if -- I know you talked about 1/3 of people actually [indiscernible]. I'm wondering if you see that number being impacted over a period of time as a result.

David H. Ownby

Yes, it's difficult to exactly measure that, Tuna. I think what we can tell you is as we look at our data, we're seeing that it's -- that those customers that are coming for some of those products, those are incremental customers because it's not cannibalizing our traditional Coke and popcorn sales.

Tuna N. Amobi - S&P Capital IQ Equity Research

Okay. Now on the film rental, I was a little surprised though on the improvement you alluded to on the -- versus the historical average, as well as the quarter-to-quarter, especially given the box office performance of the titles. And I'm wondering if you can help me understand how that occurred given the [indiscernible] performance dynamics that you talked about.

David H. Ownby

Sure. Well you heard us talk about before that what matters maybe even more than total the dollar value at the box office is how that box office is divvied up among different films. And this is not a perfect indicator, Tuna, but we use a statistic of how much of the box office is garnered by the top 3 films of the quarter. And if you look historically at Q3, the top 3 films have generated about 30% of the box office. And this quarter, that number was much lower. So the box office relied a lot more on a breadth of films as opposed to 2 or 3 high-grossing films. And typically, that leads to a little bit lower film cost for us.

Tuna N. Amobi - S&P Capital IQ Equity Research

Okay, that's helpful. And I was wondering if you can talk, perhaps, Amy, about Gravity, the impact that it had on your RPX screens. I know you mentioned that it was very strong on the IMAX. I'm wondering if what feedback you've got on how it performed and if there is any lessons that perhaps you can learn as to any bifurcation in such titles in terms of consumer feedback, RPX versus IMAX for that particular film would be helpful.

Amy E. Miles

No. I don't think that there would be any lessons learned, but I think -- when you're talking about differentiation in premium format, but I think what it does show, when you have a great film that's delivered with very, very high quality 3D, that you see what happens from a consumer response. And I can think what we all can say is we are all very pleasantly surprised with the very huge success that the industry has seen with Gravity. And clearly the consumers are preferring the premium format, and that's good for the industry.

Tuna N. Amobi - S&P Capital IQ Equity Research

Okay. I guess, another way -- that's very helpful -- another way to rephrase that question, can you provide maybe a quantification of what percent of the overall box office in that film was attributable to IMAX versus RPX versus 2D? That would be helpful.

Amy E. Miles

No, we can talk about it from an industry perspective. And I can tell you, our 3D percentage was very high, in excess of 80% for that film. So from that perspective, that's very high, but we wouldn't disclose the component on a film-by-film basis.

Operator

Our next question comes from the line of Robert Fishman of MoffettNathanson.

Robert Fishman

Just one more on Gravity. I'll take another crack at it. Can you discuss any strategies about improving 3D promotions and branding from both your perspective and the studio's perspective on future 3D releases? Or is it something that will continue to be specific to individual films?

Amy E. Miles

I think if you think about just the 3D box office from a global perspective, in 2011 and 2012, obviously we haven't finished. That was $1.8 billion in the United States, and quite a bit higher when you consider the international box office. So from that perspective, I think exhibition and the studios will have a lot of interest to make sure that we're maximizing show times, maximizing our marketing efforts. So, yes, I would expect that to continue in the future just due to the accretive nature of the 3D business.

Robert Fishman

Okay. And then maybe 2 quick questions on Open Road if I can. Can you discuss the reason for switching from Netflix to Showtime for your day 1 output deal? And also, I believe you guys signed a new film distribution partner, IM Global. Is that similar economics to the old film district deal?

David H. Ownby

We don't really talk about those specific deals. We're obviously pleased with Open Road's success so far. I think the switch you saw from Netflix to Showtime was just a normal negotiation for -- the Netflix deal had an expiration date in the future. And I think the Open Road team felt it was important to go ahead and lock up a partner post the end of that deal. And so really nothing unusual there, just a normal business negotiation. And again, we don't really necessarily comment on deals with specific distributors.

Operator

Our next question is from the line of Jim Goss, Barrington Research.

James C. Goss - Barrington Research Associates, Inc., Research Division

Well, Amy and David, I'm wondering if you would comment on the notion that, I think Lionsgate's helped to push the better use of shoulder periods, and you've indicated you'd like a better balance of films because that certainly spreads your revenue base, helps keep film cost in check. Do you think there's a sentiment around the studios that are going to take better -- make better use of those shoulder periods in the future, as this has been developing?

David H. Ownby

I think as you heard us say before, Jim, we believe that over time the traditional, I'll call them movie seasons have been expanding, and we certainly view that as a positive. We also note that as we talk to studios, they're very focused on release dates and what that means for their particular films. So again, I think we'd probably all have aligned interest there. We want the box office to do well every week. Each studio wants their film to do well. So it's just another case where we have aligned interest with our studio partners. And hopefully that -- what that means for the future is that you continue to see those shoulder periods utilized by all the different studios, not just Lionsgate.

James C. Goss - Barrington Research Associates, Inc., Research Division

You've also experimented a little with the super ticket concept, and combining it with maybe a participation in digital downloads. Is that something that will be expanded from what you've had so far?

David H. Ownby

Yes, Jim. I think we always want to make sure we stay on the forefront of testing those types of things. You're right, we did experiment a little bit with the film World War Z a few months ago. To be fair, that was a very small test and not one that was a lot of marketing dollars were spent on. But all types of things like that where we can -- we have again an aligned interest with the studios, we want to make sure that we are open to testing those types of things.

James C. Goss - Barrington Research Associates, Inc., Research Division

Okay, one last thing. One more thought on implications of Gravity. Does the success of that film and the high 3D share tend to push the argument toward more targeting of films rather than a broader film slate? And sort of corresponding with that, if you have something that is -- you think will really work in that particular environment, is there a notion of having a sort of a variable pricing on 3D rather than having everything have the same up charge if you think the demand will tolerate it for certain films in particular?

David H. Ownby

I think, Jim, what you have in the case of Gravity, it's just a piece of content that was extremely well done in 3D, and I think consumers responded to that. Now hopefully, as we move forward, other filmmakers see that and are able to use the technology in a way that they can tell their stories and get a similar result of what happened with Gravity. But certainly, from our perspective, we already offer a lot of different price points for our customers. Some of those were higher price points like IMAX and RPX. Customers who maybe don't want to spend that much money, we also have other lower priced options available. So I think at this point, we feel like we -- while we don't necessarily variable price based on the individual film, we do offer lots of different price points to our customers. And we think that accomplishes much of the same thing.

Operator

Our next question comes from the line of Murali Sankar with Janney Montgomery Scott.

Murali Sankar - Janney Montgomery Scott LLC, Research Division

I was wondering whether you could share any perspectives that you might have seen from 7, 8 years ago when the last video game console cycle kicked off? Whether you saw any impact on demand at all?

David H. Ownby

Yes. There are always lots of different things that we could look at and try to correlate to box office. And we've done many of those things over time. But no, nothing specifically that we could recall from 7 or 8 years ago when that last cycle came through that had any meaningful impact on box office.

Operator

Our next question is from the line of Matthew Harrigan with Wunderlich Securities.

Matthew J. Harrigan - Wunderlich Securities Inc., Research Division

Firstly, when you look at the NCMI share value, I know in the past people kind of gotten caught in the loop in double counting, and it's a wonderful asset for you operationally. But there are a number of ways that you can look at internally there flattering and less flattering to your valuation. I guess you can make some argument that it's underrepresented in your share valuation. And then secondly, when you look at box office right now, I mean Thor is tracking great, Hunger Games presales are great, but Sony just moved Monuments Men, and the Christmas product looks miserable compared to last year. Do you have a lot of concern about Q1? And I know you look at things on an LTM basis and you've got pretty stable patterns there. But it looks like you could have a Q1 that's going to generate some nasty headlines on the gross report at least.

David H. Ownby

Yes, I'm not -- I mean, just at a high level in terms of NCM shares, obviously we view that as a huge asset for us. Like I said we'll have give or take 25 million shares by the end of the year. That value is probably somewhere in the 475, 485 range today. So from our perspective, that's a -- it's -- we view that partially as a strategic asset. We have a long-term relationship with National CineMedia. We want to make sure we continue to have a say so on how that business is operated. We also, obviously, based on the transaction we did just recently, view part of that as a source of liquidity. And that's certainly how we'll continue to view that going forward.

And then, Matthew, as we think about the box office for Q4, I think the way we've looked at it is much like Amy described it in her prepared remarks that last year, you had 3 big films in the quarter: Skyfall, the final Twilight movie, and the first chapter of The Hobbit. This year, you have again, what appear to be 3 big titles, very similarly spaced to those 3 last year: Thor, The Hunger Games: Catching Fire, and then the second chapter of The Hobbit. Last year, obviously, you also had a lot of good fill-in product around that. Some comedies, some adult dramas, some animated titles. You have that same dynamic again this year. Now obviously, ultimately, it will depend on how each one of those individual films performs as to how the box office stacks up year-over-year. But when we look at it on paper, like Amy said, I think we remain optimistic about the potential for success there.

Matthew J. Harrigan - Wunderlich Securities Inc., Research Division

And you're not particularly concerned? I mean Q4 is okay. You're not particularly focused on Q1 yet, I assume.

David H. Ownby

We always tend to get a lot of good carryover from that holiday product, and you got some good titles there with maybe Anchorman 2. And I think American Hustle opens that week before, The Secret Life of Walter Mitty. So there is some good titles that again we would expect to get in addition to The Hobbit that we would expect to get some good carryover in the first quarter.

Amy E. Miles

And, Matthew, I think you made the point when you asked the question as well that typically when we're thinking about film products, we're looking at a much broader time frame than one quarter. So from that perspective, when one is sitting here today and looking at over the next 20, 12, 24 and 36 months, I think there is a lot to remain excited about with respect to the industry.

Operator

Thank you. There are no further questions at this time. I will now turn the floor back to management for closing comments.

Amy E. Miles

Thank you for joining us this afternoon, and we look forward to speaking again at the close of our 2013 fiscal year. Thank you.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

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