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Carmike Cinemas, Inc. (NASDAQ:CKEC)

Q2 2014 Earnings Conference Call

August 4, 2014 5:00 PM ET

Executives

Robert Rinderman - IR, JCIR

S. David Passman III - President and CEO

Richard Hare - SVP and CFO

Analysts

David Miller - Topeka Capital Markets

Jim Goss - Barrington Research

Eric Wold - B. Riley & Co.

John Tinker - Maxim Group

Michael Hickey - The Benchmark Company

James Marsh - Piper Jaffray

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Carmike Cinemas 2014 Q2 Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded today, Monday, August 4th, 2014.

I would now like to turn the conference over to Mr. Rob Rinderman, from Carmike's Investor Relations firm, JCIR. Please go ahead, sir.

Robert Rinderman

Thank you very much Collin and good afternoon everyone. Certain statements by Carmike's management on today's call may constitute forward-looking statements, which are subject to risks, uncertainties and other factors that may cause the company'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 Carmike's Annual Report on Form 10-K for the year ended December 31, 2013, and in other SEC filings.

The company undertakes no obligation to publicly update or revise any forward-looking statements. Today's call may include non-GAAP financial measures and when required, a reconciliation to the most directly comparable financial measure calculated and presented in accordance with GAAP, can be found in today's press release, which is also available at carmike.com.

I will now turn it over to Carmike's President and CEO, David Passman, for his opening remarks. David?

S. David Passman III

Thank you, Rob. Good afternoon everyone and thanks for joining us. I am going to cover some key takeaways on Carmike's ongoing strategic and operational success, among other topics, and then Richard will provide additional color on our Q2 financials and capital structure. Following our prepared comments, we will be happy to answer your questions.

Carmike once again outperformed the overall domestic box office in revenue and attendance during the quarter, which was a challenging period for the U.S. market, due to very strong box office results posted during the second quarter of 2013. Despite the domestic industry decline of almost 7%, Carmike's admissions revenues actually increased by 7% during the three month period, and our total attendance grew 4%.

On a per screen basis, our box office receipts declined less than 1%. In fact, Carmike's per screen performance was nearly 600 basis points better than the overall industry. As I have said in the past, while the film slate will vary from quarter-to-quarter, our expanded scale and companywide emphasis on customer service excellence, combined with our growing circuit of high quality theater, remain important factors in our ability to generate favorable operating results over the long term.

We believe our better than industry performance in Q2 underscores the added value of Carmike's strategic M&A and new build activity, as we continue to post solid top and bottom line results, even during difficult periods for the box office.

Let's take a brief look at the U.S. box office performance. As I mentioned, domestic admissions fell close to 7%, primarily due to the very challenging comparison to the record year ago performance. There were a number of bright spots though. The top five grossing Q2 titles, were all released in April or May, helping push the quarter to a solid start. In 2013, Iron Man 3 fueled a very strong summer season, following an early May release. This year, we had a different superhero tempo, as Captain America: The Winter Soldier, hit the big screen during the first weekend of the quarter.

Three other Q2 titles also generated over $200 million in box office receipts; X-Men: Days of Future Past, Maleficent, and the Amazing Spiderman 2. Godzilla also came very close to topping the $200 million mark. Perhaps the most pleasant surprise in the quarter was Neighbors. Unfortunately though, challenging comps from a year ago impacted June's relative performance, and these continued throughout July.

As expected, Transformers: Age of Extinction has fared very well. This late Q2 release generated more than $100 million in both Q2 and in Q3. Also performing well in Q3 has been Dawn of the Planet of The Apes. Melissa McCarthy's Tammy, not surprisingly, failed to rescue the 4th of July holiday weekend, which came up far short of last year, and it was unable to compete with the 2013 runaway hit, Despicable Me 2.

Looking at the balance of 2014, there are still many great movies on the slate. In addition to this past weekend's terrific opening of Guardians of the Galaxy, which had a three-day record take for August of nearly $95 million, upcoming releases, Teenage Mutant Ninja Turtles; The Expendables 3; and Let's Be Cops among others, will help shore up the remainder of Q3.

We remain optimistic about the upcoming holiday season as well. November releases include the Penguins of Madagascar and Chris Nolan's Interstellar, with perhaps the most widely anticipated movie of 2014 also slated to debut that month, Lionsgate's, The Hunger Games: Mockingjay - Part 1.

Noteworthy December movies include The Hobbit: The Battle of the Five Armies; Night at the Museum 3; Horrible Bosses 2; Big Hero 6; and Exodus: Gods and Kings.

Returning now to Carmike specific information; during the second quarter, we posted a 4% growth in concessions per cap, marking the 18th consecutive reporting period, in which we have achieved a year-over-year increase in this key metric. We once again topped the $4 per patron mark and generated strong gross margin, above 88%.

In addition to the range of concessions promotions that have generated success across our circuit for some time now, including refillable annual popcorn buckets, stimulus Tuesday, self-served Coca Cola freestyle machines and others. We are currently focused on expanding in theater casual dining in several select locations, as well as increasing the number of theaters with alcohol service.

Moving on to Carmike's growth goal; we have acquired and integrated, in excess of 500 high quality screens onto Carmike's circuit over the past few years. As you have heard us say, on a number of occasions, our plan has been to actively pursue complementary M&A opportunities with a targeted goal of 300 locations and 3,000 screens.

In mid-May, we announced the purchase of publicly held exhibitor, Digital Cinema Destinations or Digiplex. The acquisition includes 21 entertainment complexes, with an aggregate of 206 screens based in nine states, plus a four location 33-screen pipeline of our already signed asset purchase agreements. Our respective boards have approved this transaction, and Digiplex's shareholder vote is scheduled for nine days from today. We plan to complete the acquisition soon after that meeting.

In addition to the complementary locations and addition of four new states to our national footprint, the Digiplex transaction also brings with it, a unique expertise in alternative programming, including success with local grassroots and social media outreach in the communities in which their complexes are based. I will have more to say about this important aspect of the acquisition in a few minutes. With this transaction, our footprint will reach about 280 theaters with over 2,900 screens.

As a fairly common occurrence along the M&A trail, the twists and turns we have taken to get to where we are, have been different than we planned, and leave us needing to make some adjustments.

We have spent less cash and added more debt than we planned. Even though the debt has been solely related to lease accounting rules, rather than additional borrowings. We are on the eve of completing an acquisition of over 200 screens using Carmike stock to fund the purchase. We ended Q2 with over $145 million in cash on our balance sheet, and an untapped credit line. We believe the Screenvision acquisition by MCM will occur in the current year, resulting in an increase in our liquidity of more than $60 million on a pre-tax basis.

Now as Carmike is sitting here with significant liquidity, the traditional theater M&A environment remains very robust. We believe conditions are good for additional high quality acquisitions, with several interested sellers, and buyers remaining disciplined and rational on purchase price multiples. Accordingly, we believe the prudent course of action for Carmike, is to continue our active role as a major participant in the consolidation of our industry, which could propel us well beyond 300 locations and 3,000 screens. The top priority will of course be to generate the best ROI for the benefit of our shareholders.

We think we are in an excellent position to take alternative programming to the next level. Certainly for Carmike, perhaps even impacting this cottage industry for other exhibitors. Led by CEO and Founder Bud Mayo, a pioneer in theatrical exhibition and digital cinema, Digiplex has clearly demonstrated that there is still a largely untapped opportunity, to incrementally improve theater utilization. Since their formation less than four years ago, they have succeeded in presenting a wide range of non-Hollywood entertainment, such as opera, ballet, concerts, and sporting events among other programming, primarily booking such things during weekday times, when most theaters have the majority of their seats unfilled.

Digiplex has averaged up to 5% of its box office receipts from alternative programming in a given quarterly period. Carmike's circuit is more than 13 times larger than Digiplex. So you can see why improving our success with this content, understandably, intrigues us. We hope to bring Bud and his team of alternative programming experts into the Carmike family. While obviously in the early stages, we are setting goals to spread the Digiplex alternative programming model across the Carmike footprint over the next couple of years.

We remain active on the organic growth front, with a steady stream of recent entertainment complex openings, plus a number of new builds in the pipeline. Year-to-date, we have opened new theaters in Opelika, Alabama; Manitowoc, Wisconsin; plus a remodeled Mt. Lebanon, Pennsylvania facility. Later this week, we have a 13-screen grand opening in Montgomery, Alabama. Followed next week with a 12-screen theater, including an IMAX auditorium, set to open in West Melbourne, Florida.

We also hope to open additional new builds before the end of the year, in Fayetteville, North Carolina, and Yulee, Florida. All new builds are constructed with a premium large format screen, either a Big-D or an IMAX, as well as a host of other customer centric amenities. We are also actively adding amenities to other select locations, including VIP seating, dine-in auditoriums, adult beverages, and more. We expect to open at least two full service casual dining theaters in time for the upcoming holiday season, with more following in 2015. Our patrons will be able to order food and beverages, including adult beverages from the convenience of their seats in any of the auditoriums of these newly renovated multiplexes.

Now as I turn it over to Richard, I want to reiterate that we continue to be pleased with Carmike's performance, both at the theatrical and corporate levels. In addition to deploying available capital on M&A and new builds, we are continually focused on generating enhanced shareholder value and best-in-class customer service. Our senior executive and in-theater teams come to work each days, seeking ways to improve and build upon our success. Richard?

Richard Hare

Thank you, David, and good afternoon. A very strong second quarter of 2013 movie slate proved to be a difficult comparison, but a continuation of Carmike's positive operating momentum, including solid contributions from both acquired and new build theaters, helped us once again outperform in the second quarter of 2014, versus the overall domestic exhibition industry.

Taking a closer look at the quarter, Carmike's total operating revenues increased 7.9% to $183 million, admissions revenue rose 7.3% to $115.1 million, and concessions and other revenue grew 9% to $67.9 million. On a per screen basis, admissions receipts declined 1.1% year-over-year, significantly better than the overall Q2 industry box office, which was down 6.6% during the period.

Total attendance rose 4.2% to $15.6 million. On a per screen basis, attendance was down 3.9%, but still well ahead of reported industry declines of approximately 6%. Average admissions per patron increased 2.4% to $7.39.

Similar to the prior quarter, the modest price rise was primarily due to Carmike's extended presence in more mid-sized markets, due to recent M&A activity. Average concession and other sales per patron grew 4.1% to $4.36, with movie Muvico once again making a material contribution to Carmike's per caps.

Aggregate per patron spending rose 3% to $11.75. On the expense side, film exhibition costs were $64.4 million or 56% of admissions revenue in Q2 2014, a 70 basis point margin improvement over the prior year, when it was 56.7% of admissions. Concession costs as a percentage of concession and other revenues declined to 11.8%, down from 12.3% in the prior year period. The gross margin improvement was primarily due to lower concession supply costs.

As we discussed in our last earnings call, we are now reporting separate line items for salaries and benefits, as well as theater occupancy costs. These two items were previously included in other theater operating costs. For the larger theatrical circuit, resulting form our opportunistic M&A and proactive new build program, all three of these expense lines have risen in recent quarters as expected.

In Q2, salaries and benefits were $23.5 million compared to $21.3 million. Theater occupancy costs were approximately $21 million versus $16 million in the prior year period. Other theater operating expenses were $28.5 million, up from $23.9 million in Q2 2013. In aggregate, as a percentage of total operating revenues, these three cost categories increased to 39.9% versus 36.1% in the prior year period. The year-over-year Q2 industry box office decline of 6.6%, was a contributing factor to the reduced margin. The year-over-year increase in salary and benefits, theater occupancy costs and other theater operating expenses, primarily results from increases in our average screen count, including expected losses and theater level salaries, occupancy costs and utilities associated with operating a larger circuit.

In total, Carmike's consolidated theater operating costs increased $11.8 million to $73 million in Q2 2014 from $61.2 million in Q2 2013. Theater costs from the newly acquired Muvico and Cinemark/Rave assets accounted for approximately $10.1 million of the year-over-year increase. Incremental operating costs on our five new locations built since Q2 of last year of approximately $1.7 million, accounts for the remainder of the increase.

As a reminder from last quarter's call, we expect Muvico's total operating costs to be approximately $33 million on an annual pro forma basis, based on estimates that are outlined in prior earnings calls. Depreciation and amortization expense for the consolidated Carmike circuit is expected to total approximately $47 million annually, and the interest expense is expected to approximate $52 million annually, as a result of the Muvico acquisition.

Our Q2 operating results include a full quarter of the Muvico and Cinemark/Rave assets. We did not operate the Muvico or Cinemark/Rave assets in the second quarter of 2013. G&A expenses were $6.5 million, up from $6 million in the prior year period. The primary driver of the increase was higher professional fees, related to M&A activities. Depreciation and amortization expense increased $11.9 million, reflecting our larger circuit. Interest expense was $13 million, with a year-over-year rise attributable to financing obligations assumed from theaters we acquired last year. Operating income was $18.7 million, down from $23.4 million in the year ago period. We recorded a small loss from unconsolidated affiliates of $126,000, with the majority attributable to Carmike's Screenvision profits interests.

Net income was $3.2 million or $0.14 per diluted share. Accounting for M&A related expenses, other non cash charges and the tax effects of the adjustments to net income, Carmike's adjusted Q2 net income was $4 million or $0.17 per diluted share.

Theater level cash flow was $37.6 million and adjusted EBITDA was $32 million, or a 17.5% margin on total revenues. On a trailing 12 month basis, theater level cash flow was $137.6 million, and adjusted EBITDA amounted to $114.8 million. These are two wildly followed non-GAAP measures for the exhibition industry, with reconciliations provided in our Q2 release, which is also posted on our web site.

Turning to Carmike's balance sheet, our cash and cash equivalent quarter-end balance was $145 million. Net debt was $307.2 million, reflecting an aggregate of capital leases and long term financing obligations, plus our senior notes due in 2019. Total debt outstanding, including capital leases and long term financing obligations, is $452.2 million. At June 30, our net leverage was 2.7 times, well below our stated goal of remaining at a sub four times leverage. Q2 capital expenditures amounted to $14.5 million, and we spent a total of $22 million during the first half of the year. We expect to incur approximately $40 million of CapEx during 2014. Approximately $9 million to $10 million of this is earmarked for maintenance CapEx. As David mentioned, we have four new theater openings scheduled for the balance of the year, in addition to the three we have already opened. We have closed only one theater year-to-date, and another location is temporarily shuttered for renovations.

To sum up, despite near term challenging box office comparisons in the recent quarter, Carmike again generated better than industry box office and attendance results. We also posted an 18th straight quarter of improved year-over-year concessions and other revenue at strong margins. We are actively to expand dining and alcohol offerings, as well as other amenities at a number of our theaters, while continuing to provide the excellent customer service Carmike has become known for, throughout our hometown America footprint.

We have a strong balance sheet with ample cash and the financial flexibility to capitalize on attractive M&A opportunities that our team is actively pursuing. The company has a robust pipeline of new builds and process in both existing Carmike markets as well as several greenfield communities. Although we are -- higher fixed costs come with managing a larger circuit, we believe our ability to continue generating attractive returns, while leveraging our organizational strengths, is the prudent course of action for the long term benefit of all company stakeholders.

Operator, that concludes my prepared remarks. David and I are ready to address questions. So please open up the line.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from the line of David Miller with Topeka Capital Markets. Your line is open. Please go ahead.

David Miller - Topeka Capital Markets

Thanks for taking the question. Hey guys, congratulations on stellar results. Just a few items here. David, if I recall, and I guess I just have to go back and look at the transcript from 90 days ago, when you reported your Q1, but I think I asked you the question about hey, do you think you guys can get to that 3,000 screen bogey, by the time star wars is released? And I think your answer was -- and maybe you sandbagged me a little bit, but I think your answer was hey David, its going to take a long time to do it, its very complicated, these are family owned businesses, its people's livelihoods that are sort of at risk here. And then boom, 90 days later, and we are almost at 3,000 screens, I believe we are at close to 2,900 screens. So I am curious what changed in the 90 days? Did Digiplex just sort of fall in your lap, or did private multiples just kind of come down, to little bit more amenable levels? Just any color you are willing to give me on that would be great, and then I have a follow-up. Thanks.

S. David Passman III

You bet David. Happy to try to clarify what I said 90 days ago, or respond even to -- an update to it. But what I meant to say 90 days ago, and whether I articulated it exactly this way or not, is that it is difficult in mergers and acquisitions to predict with any kind of certainty, how quickly a deal will either come together or fall apart. And with Digiplex, it didn't fall into our laps. Bud and I have been friends for a long time, and it made an awful lot of sense to combine our two companies, and Bud was doing fantastic in alternative programming. He was doing well on lining up additional one-off theater acquisitions, and I think I did -- also mentioned, repeatedly to anyone who would ask, that I did not want to do one-off theater acquisitions, I wanted to acquire circuits. It takes almost as much effort to acquire single theater, as it does to acquire a group of theaters.

So as Bud built up 200 plus screens in the last four years, we were able to capitalize on all of that work that he and his team did, and it just really fit nicely into what we wanted to do. And on the Digiplex thing, I may get another question from another analyst on this during this call. So I am just going to go ahead and preempt a little bit on that.

One of the real sweet things that I see in this merger with Digiplex, is the ability to capitalize on what I believe Bud has made the secret sauce for alternative programming. He has infected his theater managers with a can-do attitude on getting incremental revenue on alternative programming, and we really want to try to spread that across the Carmike circuit. So for each of those reasons, Digiplex made an awful lot of sense to us, and it also worked to their shareholder's benefit, and that we are doing a stock exchange, and now we still have the same amount of cash almost, that we did 90 days ago, and lo and behold, we are only 20 locations away from our initial target.

David Miller - Topeka Capital Markets

Got you. And then Richard, if you stated this -- I apologize if you said in your prepared remarks, but what was the same store or same theater concessions performance year-over-year, not accounting for acquisitions of course?

Richard Hare

I don't have that number specific in front of me, but I can say that the concession per caps for this quarter, the increase that we had; Muvico was a significant factor in that. I think we are up $0.16 for the quarter, quarter-over-quarter and about half of that increase was for Muvico.

David Miller - Topeka Capital Markets

Okay, wonderful. Thank you very much.

S. David Passman III

Thank you, David.

Operator

And our next question comes from the line of Jim Goss with Barrington Research. Your line is open. Please go ahead.

Jim Goss - Barrington Research

Thanks. David, as long as you started to get into the alternative content a little more, I would ask, if you look at the markets you serve, vis-à-vis the ones Bud has served. Are there any differences or similarities that imply anything, as to how fast you can move the alternative up that percentage that Bud was able to achieve, with the circuit he had had?

S. David Passman III

For the most part, they would be similar. If you look at the markets that they are in, they are in secondary markets, same as us. Their theater size, average screen count is 10, same as us, and their, what I would say entrepreneurial sprit of their theater managers, same as us. Therefore, I think, we can take the teachings and the learnings that they have, and roll those across our circuit. But as you know Jim, it takes an awful lot of training to get people to adjust their mindset. So I see this as a growing, but not an immediate ability that we have. And when I say growing, I mean, its going to take Bud -- Bud is with us, or members of the alternative programming team to visit individual theaters or groups of theaters and do very specific hands-on training, very similar to the way that -- you recall, we did five years ago, with our managers in the upselling concessions and getting concessions, merchandising managers rather than just simply movie managers.

Jim Goss - Barrington Research

Okay. Couple of others; one sort of, maybe this is a Richard question, but the roughly 40% run rate you have, total other operating expenses with the salaries and theater operating costs etcetera, is that about what we should expect as a percent going forward, or was there anything unusual on the latest quarter and their percentage?

Richard Hare

Yeah I'd say, not in terms of percentage, because they are going to change based on the box office. But if you look back this quarter and last quarter, we had the same mathematical phenomenon. You had the Muvico and the Cinemark/Rave assets contributing an increase of around $10 million quarter-over-quarter, and then another $1 million to $2 million of incremental costs associated with new builds or new theaters. So that should continue on into the third quarter, and then of course in the fourth quarter, you are not going to have the Muvico, they will be baked in, part of the fourth quarter. So you just have to kind of look at the first and second quarters, so the year-over-year increases are basically the same, and then factor in when those acquisitions are layered in the third and fourth quarters, I think you should be able to come back with something fairly consistent there.

S. David Passman III

I'd just reemphasize what Richard said about -- dollar amounts are probably, when you are in a high fixed cost environment, operating environment like we are, the dollar amounts are probably more meaningful to look at, than the percentage of revenue.

Jim Goss - Barrington Research

And last thing I would ask; I know you have talked about evaluating your infrastructure costs to determine whether you move to the next stage, in terms of the acquisitions, or become a dividend payer say -- as you have gotten closer, have you given any further thought as to how those numbers come down to you?

S. David Passman III

Yeah we have Jim, and we talked about it probably at every single board discussion that I participate in, and as a board member, I think I participate in all of them. What it boils down to, quite simply is, the M&A environment we believe is so strong, and so opportunistic at this point. We really don't want to use our available cash to start paying dividends. We want to see how this M&A environment plays out, before we start using the cash for other things.

Jim Goss - Barrington Research

Okay. Thank you very much.

S. David Passman III

Thank you, Jim.

Operator

And our next question comes from the line of Eric Wold with B. Riley. Please go ahead. Your line is open.

Eric Wold - B. Riley & Co.

Thank you. Good afternoon. Couple of questions following up on the M&A topic. Just wanted to make sure, I heard right or just want to make sure I get clarification. You talked about how, obviously a robust environment out there, lot of good targets, multiples remaining at chain levels. Too much cash on your balance sheet, but then you're making an acquisition with equity. Should we think about -- is your focus really be going forward on using that cash for acquisitions, or are you comfortable using equity at these levels?

Richard Hare

It primarily is going to be cash-driven, Eric. We would have been happy to do the Digiplex transaction on a cash basis as well. But it did not meet their shareholder requirements. It hasn't worked out better for them, to be able to exchange equity.

Eric Wold - B. Riley & Co.

Okay. And then, with the leases that you have kind of taken over [indiscernible], is there anything you can do with them at this point, or kind of at what point does it become [indiscernible], while you refinance those, or get those off the books?

Richard Hare

Yeah Eric. Unfortunately, once the lease is determined to be on the balance sheet, you're stuck with it. so you can't renegotiate the terms, if it is a financing obligation or the capital lease, you just have to live with it, and let it run its course.

Eric Wold - B. Riley & Co.

Okay. And then lastly on Digiplex, and there were -- we are within a few weeks of getting that completed. Has there been any further determination in terms of the theaters they had in place at the time, as well as the [indiscernible] in terms of -- will all those still be coming along over, as they kind of preannouncements that's been done, that maybe they don't all work, and kind of give a sense of, yet, or if you're going to wait to hear until the deal is done? What kind of the pro forma annual [indiscernible] cash flow would be for the acquired circuit?

Richard Hare

Eric, I believe they announced they had five deals within the pipeline. We will be bringing four of those on to our -- in our deal. And I guess, in terms of pro forma impacts, etcetera, I would refer investors to the S4 that was filed. I believe, there is projections from Digiplex itself going out for five years, and then there is also consolidated pro forms with Carmike, as of December 31st. So between those two things, I think you can get a gauge of what the theater level cash flows this company will be generating.

Eric Wold - B. Riley & Co.

Perfect. Thank you.

S. David Passman III

Thank you, Eric.

Operator

And our next question comes from the line of John Tinker with Maxim. Your line is open. Please go ahead.

John Tinker - Maxim Group

Thank you and congratulations on the quarter. Do you think about where you want to go, as you basically hit your 3,000 screen target? Do you need -- if you do decide to keep expanding, do you need a whole new lair of management to come-in, or are you sort of equipped to go to that next level with the present team?

S. David Passman III

That's a great question John, and I unfortunately don't have a great answer for you; because what we had hoped to do originally was kind of tap out at 3,000, and the environment has stayed a little too robust for us, to continue to sit and ignore it. We will hopefully bring on some management with the Digiplex transaction, particularly in the alternative programming area, but they also have some very seasoned executives that know not only operations, but can help us as we expand into dining and VIP seating and that kind of thing.

So I think we are going to incrementally pick up a little bit more G&A than we typically do, on a circuit acquisition, and I am hopeful that what we bring in can help us scale up, if you will, on the management side.

John Tinker - Maxim Group

Just a more detailed question, in terms of the -- how many liquor licenses are you think of getting in total? And what would be your kind of thought process?

S. David Passman III

We right now have 24, and I am hoping we will more than double that in the next 12 to 18 months.

John Tinker - Maxim Group

Great. Thank you.

S. David Passman III

You bet. Thank you.

Operator

And our next question comes from the line of Mike Hickey with Benchmark Company. Please go ahead.

Michael Hickey - The Benchmark Company

Hey guys. Great quarter.

S. David Passman III

Thanks Mike.

Michael Hickey - The Benchmark Company

Just curious to hit on the alternative content, and again -- I know that Bud and his team are around 5%, I think you guys are sub-1%. I realize that, its hard to know how fast you can sort of integrate that behavior change on a theater level, to really drive alternative content sales. But can you give us any sort of idea or a bogey, in terms of where you want to be, and you want [indiscernible] and may be also give us a look at how you see that margin profile from alternative content take shape for you?

S. David Passman III

I will take a stab at it, but I am not going to make you very happy with my answer. And keep in mind Mike, that, we have an even closer transaction yet, so it’s a little difficult to say I am in the weeds with alternative programming at this point. But any one who knows me, knows it has been something that I have been very anxious to figure out for the last several years, and I just haven't been smart enough to do it. Bud has, and I hate to speak for him, but he believes that you can do the same thing at scale, as long as you do it by location. Meaning, you got to go, visit the theaters, you got to look at the markets that they are in.

You got to do some research around what kind of social environment is there, for instance, are the markets into things like concerts, or are they into things like ballet and opera. And frankly, that's a lot of blocking and tackling. So it’s a theater by theater approach. Bud has taken four years to get it up to where he has, and 22 locations. I believe, that he can visit clusters of locations, or as people can and train theater managers by groups, and we can get up to scale, I am hoping several dozen next year, that we will be at that kind of level. But that is such a difficult question to answer, until we do get in the weeds, and that's going to be post acquisition, not pre-acquisition.

Michael Hickey - The Benchmark Company

Fair enough. Thank you. And you said on what the margin profile [indiscernible] should look like?

Richard Hare

For alternative programming?

Michael Hickey - The Benchmark Company

Yeah.

Richard Hare

Yeah, as we look at their theaters, and we like the geographical fit, we are adding four new states, but they are pretty darn close to the states we are already in. As look at the geographical fit, the demographics in those geographies are very similar to Carmike market demographic. So we think, it’s a really good fit from an alternative programming angle as well.

Michael Hickey - The Benchmark Company

Okay. Last one for me, I think you've touched on this before. But it seems like requiring [indiscernible] seating here, is kind of accelerated trend. And I know you are operating in a smaller market, but certainly through M&A, sort of going through some -- well mid-sized market. So I was hopeful you could kind of update your thoughts on how you see that opportunity for you, maybe not today, but maybe in the future?

S. David Passman III

Yeah. We actually see that in several different markets, where we have been impacted by competition in particular, and where we believe we have high quality theaters in very good retail markets that this will work well in. And generally, it is a little more fluid market than -- less blue collar I would say, and we see several of those and we are moving forward with plans to do, not only recline our seating, but also alcohol and more food offerings. What I can't tell you at this point is, how many we will have done by the end of this year, or even by the end of next, but it is fitting within our, I think we said, a $40 million CapEx plan for this year, Richard? What we are doing, is still fitting within that $40 million, with just a slight reallocation of CapEx.

Michael Hickey - The Benchmark Company

Okay. Thanks guys. Best of luck.

Operator

And our next question comes from the line of James Marsh with Piper Jaffray. Please go ahead.

James Marsh - Piper Jaffray

Great. Thanks very much. David, I guess one thing I always liked about your 300 theater, 3,000 screens goal. It was a big realm number. I was just hoping, you could give us a sense for what the next goal might be? Is it something we should expect to be, kind of incremental for that, or maybe another big round number?

S. David Passman III

James, to tell you the truth, I can't answer that today, but a lot of people within our organization are suggesting that ought to be another big round number. And, if you take the $145 million of cash that we have at June 30, and you add to it, say $30 million to $50 million after-tax for the Screenvision sale, that would indicate that, we would have in excess of $200 million, and at $400 per screen, you can do the math and figure out where that would get one. And right now, there are enough deals in the market, that we wouldn't have to get more than our fair share to hit that kind of number.

James Marsh - Piper Jaffray

Understood. Okay. All my other questions have been answered. Thanks guys.

S. David Passman III

Thank you.

Operator

And gentlemen, there appear to be no further questions in queue. You may now continue with your presentation, or closing remarks.

S. David Passman III

Okay. Thank you, Collin, and ladies and gentlemen, thank you again for joining in. We look forward to speaking with you again shortly after the third quarter results. Have a good evening.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation. You may now disconnect your lines.

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Source: Carmike Cinemas' (CKEC) CEO S. David Passman III on Q2 2014 Results - Earnings Call Transcript
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