Regal Entertainment's CEO Discusses F4Q 2013 Results - Earnings Call Transcript

Feb.14.14 | About: Regal Entertainment (RGC)

Regal Entertainment Group (NYSE:RGC)

F4Q 2013 Earnings Conference Call

February 13, 2014 16:30 ET

Executives

Amy Miles - Chief Executive Officer

David Ownby - Chief Financial Officer, Executive Vice President, Treasurer

Analysts

Eric Handler - MKM Partners

Townsend Buckles - JPMorgan

Martin Pyykkonen - Wedge Partners

Tony Wible - Janney

Barton Crockett - FBR Capital Markets

Ryan Fiftal - Morgan Stanley

James Marsh - Piper Jaffray

Robert Fishman - MoffettNathanson

James Goss - Barrington Research Associates

Presentation

Operator

Good afternoon. My name is Doug. And I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regal Entertainment Group Fiscal Fourth Quarter and Full Year 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.

All lines have been placed on mute to prevent any background noise. After management’s remarks there will be a question-and-answer period. (Operator Instructions) As a reminder, if you are on a speaker phone please pick the handset before presenting your question.

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 could 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 Miles

Good afternoon, and thank you for dialing into our year-end conference call. First and foremost, we are pleased to report that 2013 was a record year for both the exhibition industry and Regal. For the second year in a row and the third time in the last five years the industry established a new record revenue mark with total box office receipt of approximately $10.9 billion.

The healthy box office environment combined with the impact of our acquisition of over 800 screens in late 2012 and early 2013 and our focus on managing our cost structure enabled us for the first time in our history to generate total revenue of over $3 billion an annual adjusted EBITDA of over $590 million.

We will provide further detail regarding these results throughout the call, but I want to emphasize how happy we are that our strategic and operational execution yielded record results for our shareholders in 2013 and take just a moment to highlight some of the key takeaways for the past year.

From our perspective in an often overlooked aspect of our industry is a continued long-term stability at the domestic box office. Our industry as always experienced and will continue to experience short-term quarterly fluctuations in box office revenue and attendance primarily related to the commercial appeal of the content available in any given period.

But against that backdrop of quarterly ups and downs long-term box office and attendance trend have remained remarkably consistent. Industry box office revenue has exceeded the $10 billion mark and industry attendance has remained near the five year average of 1.35 billion people in each of the last five years.

Industry consolidation was also front and center in 2013, in total over 1700 screens changed hands in 2013 and has been the case throughout our history Regal led the way by acquiring over 500 screens from Hollywood theaters. Our management team’s expertise at executing and integrating acquisitions was a key driver of our success in the past year and we continue to believe that strategic acquisitions had accretive multiples are a great way to deliver ongoing shareholder value.

As we look ahead, we remain optimistic regarding a potential for further industry consolidation in the coming years and we look forward to evaluating future opportunities.

For the past several years, we have frequently discussed our efforts to bring a premium experience and enhance customer amenities to a larger portion of our customer base. Those efforts intensified in 2013 as we expanded our rollout of existing amenities primarily our large format IMAX and RPX auditoriums and enhanced concession menu and began installing new concepts including VPI auditoriums at traditional theaters, luxury seating and alcohol beverage offerings.

We are pleased with the incremental revenue and returns from our investments in the premium experience and expected programs to positively impact our results in the years ahead. Another key takeaway from 2013 is a continued success of our various industry partnerships. Our relationship with National CineMedia accounts for a meaningful portion of our annual cash flow and provides an important synergy when we acquire other circuits.

The management team at DCIP has done an excellent job transitioning from managing the rollout and installation of digital projectors to providing administrative and value added back office services. DCDC is up and running and is already delivering content via satellite to over 800 locations across the U.S. and last but not least Open Road Films which just completed their second full year of operations generated approximately $150 million of box office in revenue in 2013 and just a few weeks ago released the animated comedy The Nut Job, their highest grossing film today at just over $55 million.

We are extremely pleased with their recent performance of each of these partnerships and remain optimistic regarding the ability to create incremental value for our shareholders. And finally, in the past we have clearly and consistently communicated that using our cash in ways the best benefit our long-term shareholders. By investing in the growth of our business and providing a meaningful return to our shareholders is cornerstone to our strategy.

We are excited about the returns being generated by our recent investments and accretive acquisitions and the premium experience and believe those investments will continue to benefit our free cash flow for years to come. And keeping with our strategy, we are extremely pleased to pass along some of that benefits to our shareholders in the form of a 5% increase to our recurring dividend bringing the current yield to approximately 4.5% as of yesterday’s close.

And for the current period although box office for the fourth fiscal quarter held up reasonably well following only 1.5% despite a difficult comparisons with a near record total last year, the underlying drivers of that revenue and their impact on our financial results were distinctly different. Last year’s fourth quarter box office was driven primarily by attendance as opposed to price as premium ticket sales accounted for a relatively low 13% to 14% of box office receipt.

In sharp contrast, ticket price was the key driver in the current quarter as routine price increases and a surge in premium ticket sales due in to a large part to the success of Warner Brothers Gravity pushed industry ticket prices higher largely offsetting an estimated 7% to 8% decrease in industry attendance.

As we discussed in the past attendance to the single most important driver of our operating results and margins. This quarter is no exception. The increase in premium ticket sales and our field personnel’s effort to manage the variable portion of our cost structure help mitigate but simply could not offset the impact of industry attendance decline on our fourth quarter results.

As we look ahead to this coming year, fiscal 2014 is off to a great start at the box office, industry box office receipt for the first six weeks of our fiscal 2014 increased approximately 8% versus the same period last year thanks primarily to strong carry over for films – of our films that were released late in the fourth quarter.

Compared since the last year appear manageable for the remainder of the first quarter and we are optimistic that high-profile titles like Warner Brothers 300 sequel, DreamWorks animation, Mr. Peabody & Sherman and Liongate’s Divergent will keep box office results on track in early 2014.

Looking ahead to the remainder of the year comparisons will be more difficult given the record center box office in 2013, but we are encouraged by what appears to be a promising lineup of high-profile films that are well-spaced throughout the release calendar.

Superhero fans will again have plenty of choices at the box office with Capitan America in early April, the Amazing Spiderman 2 and the Next Chapter of the X-Men franchise in May and Marvels, Guardians of the Galaxy in late summer.

Science fiction fans won’t be disappointed either with Godzilla, Transformers 4, Dawn of the Planet of the Apes and Teenage Mutant Ninja Turtles all scheduled for release this summer. A number of key films from other genres including 22 Job Street, the sequel to How to Train your Dragon and Disney’s Maleficent, round out what appears to be a promising summer schedule. And while the holiday release schedule is still taking shape, it appear there will be headlines by Hunger Games and Hobbit franchises and The Interstellar, an original title from acclaimed director, Christopher Nolan. With these factors in mind, we are optimistic regarding the potential box office success of 2014.

In summary, while we were disappointed with the fourth quarter didn’t meet Wall Street expectations primarily due to weak industry attendance. We are pleased that the combined power of our accretive acquisitions and healthy overall box office environment led to record results for fiscal 2013.

I would now like to turn the presentation to David for a discussion of our financial performance.

David Ownby

Thanks Amy, and good afternoon, everyone.

For the next few minutes, I will provide a brief analysis of our fourth quarter results, an update with respect to our balance sheet and asset base and some modeling guidance for 2014.

For our fiscal fourth quarter, we generated total revenues of $739.9 million including $503.6 million of box office revenue, $193.3 million of concession sales and $43 million of other operating revenue.

As was the case in the past two quarters, our recent acquisitions had a positive impact on our market share in the fourth quarter as our box office revenue grew by almost 4% in the aggregate as compared to a 1.5% decline for the industry.

Excluding the acquired screens, our per-screen attendance decline was similar to the industry decline that Amy mentioned earlier and our average ticket price grew by 6% benefiting from those routine price increases and an increase in the percentage of our revenue generated by premium ticket sales.

Our concession revenue increased by 2.5% in the aggregate and by $0.12 or 3.5% on a per-attendee basis. Strategic price increases, improvements in popcorn and beverage volume and the continued success of our expanded food menu all contributed to the increase and help drive per cap growth of over 2.5% for the tenth consecutive quarter. Other operating revenues declined about $4.6 million as compared to the same period last year, due primarily to lower revenues associated with our gift card and advanced ticket programs.

Our film and advertising expense of $265.6 million represented 52.7% of admissions revenue, an increase of 100 basis points as compared to the same period last year. A film slate that was dominated by five high-grossing films, the Hunger Games, Catching Fire, Gravity, Frozen, Thor the Dark World and the second Hobbit film collectively accounted for almost half of the quarter’s box office. And an increase in promotional advertising cost associated with our seven theater openings this quarter combined with increase that the higher film relate to those five films were the primary drivers of the increase.

Our 86.7% concession margin improved by 40 basis points as compared to the same period last year as minor increases in raw material costs were more than offset by an increase in the amount of vendor marketing revenue recorded as a reduction of cost of concession.

Total rent expense of $103.7 million increased 4.6% 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 4.7% as compared with the same period last year due to slightly lower rent amounts associated with the acquired theaters and lower contingent rent expense stemming from the decline in our per screen revenues.

Total other operating expenses of $215.1 million increased by 13.3% in the aggregate due primarily to the cost associated with the newly acquired screens and by approximately 3% on a per-screen basis. While our managers and field personnel reacted appropriately to the attendance environment and reduced payroll cost per screen those savings were eclipsed by a pre-opening cost associated with the seven new theaters we opened this quarter. And increases in payments to IMAX and RealD associated with the increase in our premium format revenue, increases in selling expenses associated with our gift card and discount ticket programs and increases in other non-rent occupancy cost.

Again, while we are disappointed that the decline in our per-screen attendance and the increase in our film rent and advertising costs resulted in a rare miss of consensus Wall Street estimates for revenue and adjusted EBITDA. We are pleased that a healthy box office environment and the impact of our recent acquisition enabled us to generate record results in 2013.

As for our asset base in our balance sheet, capital expenditures net of assets sales for the quarter totaled $41.4 million. And we continue to actively manage our asset base, opening 7 theaters with 88 screens, and closing 2 theaters with 28 screens to end the quarter with 580 theaters and 7,394 screens. Based on our development schedule for the coming year, we expect full-year capital expenditures to be between $115 million and $125 million. We expect to open 7 to 9 new built theaters with 80 to 100 screens, and close 8 to 10 theaters with 60 to 80 screens, which would result in ending counts of approximately 579 theaters and 7,414 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 2.2 million units of NCM related primarily to our Great Escape acquisition. And during the fourth quarter, we received an additional 3.4 million units primarily as a result of the Hollywood acquisition, both in accordance with the common unit provisions of our agreement with NCM.

As of year end, our stake in NCM totaled approximately 25.4 million shares with a current market value of over $450 million.

With respect to the balance sheet, we ended the quarter with just over $280 million in cash and a total debt balance of approximately $2.3 billion. Our recent acquisitions and the corresponding growth in our annual adjusted EBITDA has had a positive impact on our leverage calculation. And as of the end of the quarter, our overall leverage ratio was 3.4x net debt to adjusted EBITDA.

As we look ahead to 2014, we want to take this opportunity to provide modeling guidance related to our fiscal calendar and a few other specific items. As most of you know we operate on a fiscal year that always end on the first Thursday after December 25th. In certain years including 2014 that result in a 53-week fiscal year as opposed to our normal 52-week year. That extra week falls entirely into the fourth quarter which will have 14 weeks as compared to the normal 13 and has a significant impact on our results as they fall between Christmas day and New Year’s day traditionally the busiest movie week of the year.

As a point of reference in 2008, our last 53-week year, the extra week accounted for approximately $74 million of box office revenue 9.7 million attendees and $47 million of adjusted EBITDA. Also please note that our acquisition of 513 screens from Hollywood theaters closed at the beginning of the second quarter of 2013 and accordingly will not impact our comparison beginning in the second quarter of 2014.

We encourage analysts and investors to take the time necessary to understand the impact of our fiscal calendar and recent acquisitions as you formulate your estimates for the coming year.

And finally, given our current asset base in capital structure, we expect full year depreciation expense of approximately $203 million and interest expense of approximately $141 million in fiscal 2014. We are again extremely pleased that a healthy box office environment combined with our strategic and operational execution resulted in record results in 2013. We remain optimistic regarding the potential for continued success in the coming year.

Operator that concludes our prepared remarks. And we will now open the lines for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Eric Handler from MKM Partners. Please proceed with your question.

Eric Handler - MKM Partners

Yes. Thanks for taking my question. Two questions for you guys. First, on the quarter, usually fourth quarter you guys get a big bump in other theater revenue because of gift card sales and really the fourth quarter other theater revenue was flat pretty much with the third quarter. Was there something unusual that happened there?

And then secondly, with DCDC now in place and implemented, I'm wondering over the course of the next two years how do you think that -- could there be any impact on your cost structure?

David Ownby

Hi, Eric. On the other revenue question, we had a really good year on that line item. I think for the year that line item is up about 10% in the aggregate. In the first three quarters of the year, that line item is largely driven by vendor marketing revenue and in-theatre revenues like theatre rentals, birthday parties, arcade games those kind of things.

In Q4, the driver of that number really shifts more to our gift card and advanced ticket programs. And our recent experience on those programs is that more of those products are actually being redeemed in our theaters. And while that has a bit of a negative impact on this particular line item, from an overall business perspective that’s a good thing that people are using those products and actually coming to the theatre. So I think that’s what you see in the other revenue line.

I will let Amy take the DCDC question.

Amy Miles

Okay. I think -- and just a little bit of an update with respect to the completion of the rollout for Regal. We believe we should be finished 100% with the rollout by the and/or call it second quarter so July or August of this year. So maybe rolling a little bit into the third quarter, but by that summer period. And one of the things that we talk about before from a cost savings perspective because there is probably a couple of million dollars as we move into satellite delivery of film versus hard drive delivery of film. We have shipping cost savings in there.

But I think one thing it does Eric, when we are not thinking about the cost side, is open up additional opportunities for programming and I wouldn’t capture that number when I talk about the $2 million of cost savings and I think time will tell what’s that number is. But we are also excited about the opportunity from a programming perspective as it relates to DCDC.

Eric Handler - MKM Partners

So then along those lines now that you've got now that you, Cinemark and AMC, have your joint venture now with Fathom, how -- at what point do you start looking at Fathom and start rolling out maybe a different type of business model?

Amy Miles

Well, I think from that perspective there is probably in fairness to say a transition period that’s going to happen and for most of 2014. So as we transition the business from NCM to the new venture. So but, we are already looking at new and incremental ways to grow that business. So I would say that as you look past probably 2014 is when you will probably start to see some of the benefits – some of the changes that we have made.

Eric Handler - MKM Partners

Great. Thank you very much.

David Ownby

Thanks Eric.

Operator

Our next question comes from the line of Townsend Buckles from JPMorgan. Please proceed with your question.

Townsend Buckles - JPMorgan

Thanks. David on the higher lift in some of your operating expenses can you say how much the new theater openings drove your film rent and advertising percentage? And other OpEx growth?

David Ownby

Are you asking about other OpEx or film advertising --

Townsend Buckles - JPMorgan

Well, I think you -- didn’t you mention it as a driver for both of those items?

David Ownby

For other OpEx, I did, not for films, so we could talk about them separately. But for other OpEx if you just kind of look I think we were up about $900 a screen on other OpEx and just maybe three things I’ll kind of point out there. We had about $2 million of incremental theater opening expenses versus the same period last year. Q4 last year we opened two theaters, this year we opened seven theaters in Q4 that’s not surprising.

I think the increase in the amount that we pay to RealD and IMAX that goes with the increase in the premium revenue that was about $2.6 million and then we had about another $1.5 million of increase in our selling expenses for our fourth quarter gift card push. So those three combined accounted for about $800 of that $900 increase that you saw there.

Townsend Buckles - JPMorgan

Okay. Thanks. That’s helpful. And so on the film rent, we shouldn’t read in that they were higher terms paid that was just a mix of films and studio?

David Ownby

Just a couple of things I’ll point out there Townsend, if you look at the break down there as I mentioned in the call it was, we had some, and you were correct, I did mention the theater openings there because we have advertising promotions that we do for those new theaters, about 40 bps of that 100 basis point increase was related to those additional cost to market those new theaters. At then again, like I said on the call was well, if you just look at the concentration for the quarter midway through the quarter it looked like it was going to play up pretty similar to last year but the way particularly the way Frozen played out in those last few weeks of the quarter, it kind of pushed the concentration of a good bit higher. So I think we typically used kind of that, that top three films as a good marker and the top three films this quarter which included Frozen because of late push accounted for about 33% of the box office that’s versus the Q4 average is more like about 25% for the top three but not surprising there that that number was a little bit higher.

Townsend Buckles - JPMorgan

And Amy if you could give us an update on the M&A environment any pick up in activity there or still pretty quite?

Amy Miles

We’re constantly from a proactive perspective seeking opportunities in the industry. And I think like we said may be at our third quarter call. If we look out over the next, I'm going to call it 12 to 36 months we’re very optimistic that we’re going to continue to sign accretive acquisition opportunities for the company. But we look at it Townsend, probably over just a little bit longer time horizon but yes we do remain optimistic about opportunities we’re going to have on the M&A front.

Townsend Buckles - JPMorgan

Okay. Thank you.

Operator

Our next question comes from the line of Martin Pyykkonen from Wedge Partners. Please proceed with your questions.

Martin Pyykkonen - Wedge Partners

Yes. Thanks. I don’t know if I just missed this, did you talk about the premium percentage of revenue as far as Q4, so I missed that –

David Ownby

We talked about going up Martin, I don’t think we gave you the number. Q4 of last year the premium formats collectively accounted for about 13.5% of our revenue that number was not 19.9% of this year.

Martin Pyykkonen - Wedge Partners

Okay. Thanks. And then just a follow up on what Amy just said, as far as the M&A when you talk about 12 or 36 months I guess using the baseball analogy at what inning, does it go beyond that as far as accretive thing that you would expect to find and how much of even in the 12 and 36 and beyond is those that have not been able to financial upgrade to digital or are we kind of past that part of the cycle as far as the M&A opportunities? And then just lastly on RPX specifically this year any update on numbers that you plan to implement and have operating by the end of the year and any particular, promotional things you plan to do around that your own premium format? Thank you.

Amy Miles

Okay. I'm going to try to hit the consolidation question there first. With respect to the aspect of your question related to digital, I would say we’re past that piece. I think most of our opportunities that we will be pursuing going forward are going to be theaters that feature digital projection. And as it relates to -- its hard to size that opportunity but I think we’ve said before as we look out and let’s call it’s a regional players, lets use that kind of to define the universe that we’re talking about today. We believe there is probably about another 2500 to 3000 screens now again trying to find an accretive deal that’s why we give ourselves that longer timeframe, but if we try to size that universe I think that’s about where we would come out Martin.

Martin Pyykkonen - Wedge Partners

Okay.

David Ownby

Martin on the RPX front, we ended this past year with 62 RPX screens, we got an additional 12 installed there in the fourth quarter so that is a good quarter from that perspective. Think about go forward guidance there, that number is probably going to grow about 20 to 25 in 2014.

Amy Miles

And one thing about I will just add from that RPX perspective, one thing what we’ve been really pleased is, we say its kind of met on all aspects of the business. And what I mean by that is, you can see the consumers based on our numbers are gravitating towards the RPX screens. The studios are inquiring about booking films in the RPX locations and then also we joke and say every theater that we go to the theater manager would like to have an RPX screen in his or her complex. So from that perspective we’ve been very pleased with that strategy.

Martin Pyykkonen - Wedge Partners

Yes. And one more quick twist on that if you could, I know you have not gotten any sort of national advertising or really out there spending a lot of money on building the brand, but you're done a good job at the ticket window and the upsell and the local general managers of facilities. Does that seem to be working well in driving attendance growth in the RPX screens?

Amy Miles

Yes. We think it is. At this point its very local market focus but we believe that using our Regal Crown Club and some of the other strategies that we have put in place are working from an advertising are aware of that perspective.

Martin Pyykkonen - Wedge Partners

Okay. Thanks.

David Ownby

Thanks Martin.

Operator

Tony Wible from Janney. Please proceed with your question.

Tony Wible - Janney

Thanks. I guess there are a number of factors over the course of this past year the kind of skewed ticket pricing, if we think about it normalizing over the course of the next year kind of barring obviously any kind of acquisition noise. What are your thoughts on kind of baseline ticket price increases? And then secondly, can you comment on anything you've seen or learned from the super ticket tests?

David Ownby

Hey, Tony, I’ll take the ticket price question. I think as we’ve kind of talked about before we see, we continue to believe we can kind of raise the base ticket price in more or less that historical range, which I would call kind of 2.5% to 3%. And when I say that number obviously I'm assuming that the premium formats stay relatively flat in terms of percentage of overall box office to the extent those go up or down, obviously that’s going to continue to impact our ticket price quarter-to-quarter and year-to-year. But I think when we think about the, just our processing strategy we do think we can continue to pass on kind of low single-digit ticket price increases without really impacting attendance.

Amy Miles

And I think Tony at this point, we’re not going to disclose any numbers with respect to the Super Ticket, but I can tell you that we were pleased with the program as well as Warner Bros as it relates to the most recent test and we are looking at ways that we could continue to test this concept in the future.

Tony Wible – Janney

Great. Thank you.

David Ownby

Thanks Tony.

Operator

Our next question comes from the line of Barton Crockett from FBR Capital Markets. Please proceed with your question.

Barton Crockett - FBR Capital Markets

Thanks for taking the question. I was curious about wage pressures, and Obama is pushing higher minimum wage to a degree and I don't know to what extent you think that might kind of filter down to your employee base and create any pressures there?

Amy Miles

With respect to that Barton, if you think about it, a lot of the states where we operate today already have a higher minimum wage in the federal. So from that perspective and we’re operating obviously under state regulations as we speak. And from an employment perspective we think about it also as very market driven from that what we need to pay from that perspective. So most of that is driven for us by market dynamics and state minimum wage and fairness probably more so than federal minimum wage.

Barton Crockett - FBR Capital Markets

Okay. But, federal minimum wage you see that, I mean one thing goes up it could impact all the others around it, I mean do you see any sense that this could result in any wage pressures at all? Or are you --

Amy Miles

Yes. I mean, I guess I wouldn’t say none at all. But I would say the majority of our employees at the entry level are above that number anyway or above federal minimum wage as we speak because again, the state numbers are higher.

Barton Crockett - FBR Capital Markets

Okay. And then if I could switch gears a little bit on Open Road, which is just tremendous how successful they've been. At what level does it get the scale that you could think about spinning that off kind of like you've done with NCMI? Are we anywhere near that? What would it have to be to kind of contemplate that seriously?

David Ownby

Barton, I’d have a hard time putting a timeframe on that maybe but I think one of the things that often times when you see the valuations on some of these types of companies some of that’s driven by the library value. And so I think Open Road is just going to need some more time to build their library obviously as you mentioned we’re very pleased with what they’ve able to do so far. And this point, it’s out in the prepared remarks but they did actually turn to profit for 2013, which is for a start up company with their age, I think is a big accomplishment for them. And so from that perspective we continue to be pleased with their performance and the synergy that we get from that relationship and we’ll continue to look for success in the future there.

Barton Crockett - FBR Capital Markets

Okay. And then just one final thing, I'm sorry to ask so many questions here, but at the beginning you highlighted some of your investments and things like bars and some premium experience. The level of investment that you guys are doing seems to be though much less than AMC is talking about doing, $1 billion over five years into largely seats and some other things.

Do you see something down the road where you guys might rethink radically kind of your CapEx profile and get really aggressive on pursuing big changes across your circuit, or does it really kind of just fit in with your kind of CapEx profile and more kind of measured changes as opposed to massive change?

David Ownby

Hey, Barton. I think when you’re thinking about that capital investment, you’re probably may be ignoring the fact that over the last couple of years we’ve acquired a lot of theaters so we have chosen to spend our dollars that way as opposed to CapEx. And we’re always going to take our free cash flow and evaluate the best uses for that, for the last couple of years we believe that, that is the best use of the cash has been primarily to spend it on acquisitions. We get an immediate return there. We get a high return there. And obviously, we’re going to continue to look for those opportunities.

In conjunction with that we’ll continue to reinvest in our theaters whether that’s not building new theaters or we’re investing in existing buildings and again, we’ll always do that with a return minded focus.

Barton Crockett - FBR Capital Markets

Okay, great. Thank you.

David Ownby

Thank you.

Operator

Our next question comes from the line of Ben Swinburne from Morgan Stanley. Please proceed with your question.

Ryan Fiftal - Morgan Stanley

Hi. This is Ryan Fiftal on for Ben. Just want to ask on the dividend raise, how did you come to decide the 5% number was the right one for this year? I guess, put another way, when you're making your recommendation to the Board, how do you think about returning capital versus other investment opportunities that you have?

David Ownby

Fortunately Ryan, we have enough free cash flow that we don’t always have to decide between two different strategies we can actually do both or do multiple strategies with our cash. I think that’s the good news and I think here we just looked at it and felt like given that we felt like we had an increase in our sustainable free cash flow going forward from the acquisitions. It was probably time to return some of that value to shareholders. And I wouldn’t say there was any real magic to the number obviously we already pay a pretty significant yield. So it’s not like we needed to go from a mediocre yield to a high yield it was just more a function of the fact that we had more cash flow allocated at this point.

Ryan Fiftal - Morgan Stanley

Okay. That makes sense. It's probably a tricky question. And then on the industry side, I think there were some press reports that Paramount was talking about ending film prints, I wouldn't expect that to impact you guys very directly given that you're digital, but do you expect any potential impact to the industry from that move.

Amy Miles

I mean I guess we have expected and talk about the transition Ryan, we’re away from film to digital for a couple of years. And at one point in time forecast, but it was probably around 2014, 2015 when this would start to happen. So I guess from that perspective it was not unexpected from a timeline. And I think you’ve may still see some older theaters that are having a hard time finding a way to finance that conversion to digital close. But I think that’s just going to be a market-by-market impact based on where those theaters are located.

David Ownby

I think the most recent numbers for that Ryan 90 plus percent of the industry had converted and that when you think about how much box office represents is probably even a greater number than 90%. So it seems like the impact will be relatively small going forward.

Ryan Fiftal - Morgan Stanley

Okay. Thank you.

David Ownby

Thank you.

Operator

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

James Marsh - Piper Jaffray

Great. Thank you. Just two quick questions here. First, I was wondering if you guys had an opinion on NATO's comments regarding limiting the length of trailers, and if you could just potentially discuss the impact there -- any financial impact or any impact on the relationship with studios?

And then secondly, I was hoping to circle back on that premium ticket sales as a percentage of total admissions. I guess you highlighted a pretty wide range for fourth-quarter in 2013 versus 2012, just any sense for how that might look in 2014? Just directionally or maybe trying to tighten that range up a bit?

David Ownby

Yes. I’ll take that second question first James. If you look at the numbers on a quarterly basis obviously, you’ll see some fluctuation based on the content. If you look at the numbers on an annual basis that kind of been really in the post Avatar period so since 2009, the premium formats have accounted for give or take between 17% and 20% of the box office, I think it might come in just a little bit lower than that for 2013.

Some of that obviously is going to depend on content every year its going to depend on the number of films every year. So I don’t think we see a big swing in those numbers whether it goes a little bit outside of that range one way or the other, I guess that remains to be seen that’s probably is anybody’s guess.

Amy Miles

And with respect to the question on the NATO guidelines that were issued. I think it’s important to note that those guidelines were voluntary and they hit on a lot of different aspects with respect to marketing in the theaters. And I think you specifically mentioned a trailer length of two minutes there. What we always want to do is make sure that we try to balance on the length of the time of the trailers and its the amount of trailers that a customer will see as well as having adequate time to tell the story of the film appropriately in a trailer.

So from that perspective I think you’re going to see different answers for different films but again the goal there is, its hard to strike that right balance between length of previews and the studio has been able to appropriately market the films.

James Marsh - Piper Jaffray

Okay. That is helpful. Thanks.

David Ownby

Thanks James.

Operator

Our next question comes from the line of Robert Fishman from MoffettNathanson. Please proceed with your question.

Robert Fishman - MoffettNathanson

Hi. Good afternoon. I got one for Amy and one for David if I can. Amy, can you help us better understand how you're monetizing the Regal Crown Club today and what future opportunities there are for these members?

Amy Miles

Yes. I think today we spend a lot of time, we’ve had a lot of growth in the Crown Club this year. If you want to look at just kind of total dollar spent, I’ll focus on that and we’ve had both an increase in membership and an increase in total dollar spent. And as we look back over fiscal 2012, the Crown Club member spend about $750 million, $770 million or so million dollars at Regal and as we look at fiscal 2013 that number is in excess of $900 million or $950 million for fiscal 2013.

So I think the numbers speak for themselves with respect to how we’re monetizing. And I think really what we’re trying to do there is, how do we better target, how do we better inform the customers – if you are interested in a certain genre, how do you make you aware of movies that are going to coming soon that will be of interest to you. So there is a lot of how we’re trying to monetize today is how do we drive attendance or an increase in attendance by having better targeted offer to our frequent moviegoer.

And then I'm sorry those offers are based on not only box office side but also figuring out how we can drive increased concessions as well because its obviously that’s the most profitable piece of our business. So we’re also spending a lot of time with the Crown Club figuring out new and innovative ways to drive concession sales.

Robert Fishman - MoffettNathanson

Okay. Thank you. David for the other operating expenses, to go back to that are there any cost saving initiatives either from additional synergies from your acquisitions or just on the core business that can help keep growth and these type of expenses more limited this year?

David Ownby

We went through that process back in 2010 and 2011 and took a lot of those costs out and I think what we said since then the opportunity to ratchet down a whole lot more is probably behind us at least in a significant way kind of said that we’ll always continue to look for ways to be more efficient in ways to better schedule payroll and them make sure we did those things accordingly. But I think by and large our guys in the field has done an admirable job of doing that.

Robert Fishman - MoffettNathanson

And maybe if I could squeeze one last one in, were there any markets of your key markets where you outperformed or underperformed in fourth quarter? And are you seeing the extreme weather that we are seeing so far in Q1 impact any of these markets?

David Ownby

Nothing out of the ordinary. I think for the year this year we were pretty much right on with the industry in terms if you kind of factor out, if you look at the -- exclude the acquired screens, which are in smaller markets. But on kind of a same-store basis we were pretty much right in line with the industry for the year probably up a couple of quarters down a couple of quarters in the year but for the year right on point.

So no nothing unusual and from a weather perspective that’s something we do in every year and some years that impact more than others but it did not for our annual results ever been a big driver.

Robert Fishman - MoffettNathanson

Okay. Thanks a lot guys.

Operator

Our next question comes from the line of James Goss from Barrington Research Associates. Please proceed with your question.

James Goss - Barrington Research Associates

Thanks. First question about concessions. As you do experiment with different concessions approaches, how are you coming down in terms of early returns as to whether it's better to go after margin or dollars in the various approaches you use? And have any of these efforts created any impetus for a higher percentage of patrons actually buying concessions?

David Ownby

Jim, like we talked about on other calls where we continue to roll out our expanded food menu and have been happy with that. And we are continuing to roll that out in fact we probably had our best quarter here in Q4 from just a pure increase in our food. Per cap perspective, I think we were, our food per cap for the quarter was up about 2% and was a key driver of that overall per cap increase for the quarter.

As we think about refining that menu and – what products work best and then in different location that’s really a market by market location. Some sites will do better with food items other site do better with alcoholic beverages that’s just something that we really rely on our local district managers and our operation folks to kind of gauge the audience for these individual theater. So the answer to your question is probably sum of all of those depending on what theater it is.

James Goss - Barrington Research Associates

Okay. Separate issue, RealD was talking about getting behind select 3D films with more promotional support. As sort of that process matures a little bit, are you in sync with them and the notion of trying to figure out if there is a gravity amidst the films and to try to put more effort into it? How are you approaching that particular effort?

Amy Miles

We welcome any additional promotion with respect to 3D or any other film from that perspective. So yes, we would be in sync with RealD on that effort.

James Goss - Barrington Research Associates

Okay. And maybe lastly, film rental margins, as you've made acquisitions in smaller markets, I'm wondering what has been the bigger driver of the margin? The nature of the film or in terms of blockbuster versus smaller film depending on studio support versus the size of the markets served?

David Ownby

Hey, Jim. The size of the market don’t really enter into it that much, that has, like we have talked about before more to deal with a number of high grossing films in a particular quarter. Just one for example, I think we had five films that in the quarter that ultimately grossed over $200 million that’s pretty rare for the fourth quarter, so that’s why you see that uptick there in our film and advertising cost. But that’s the market size where that box office dollar is generated doesn’t really enter into that film negotiation that much.

James Goss - Barrington Research Associates

All right. Well, thank you.

David Ownby

Thank you, Jim.

Operator

There are no further questions in the queue. I’d like to hand the call back over to management for closing comments.

Amy Miles

Thank you for dialing in. And we look forward to speaking to you in a few months with respect to our first quarter results. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your line at this time. And have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!