Regal Entertainment Group's CEO Discusses Q2 2011 Results - Earnings Call Transcript

| About: Regal Entertainment (RGC)

Regal Entertainment Group (NYSE:RGC)

Q2 2011 Earnings Call

July 28, 2011 4:30 pm ET

Executives

Amy Miles - Chief Executive Officer and Director

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

Analysts

Anthony Wible - Janney Montgomery Scott LLC

Eric Handler - MKM Partners LLC

Joseph Hovorka - Raymond James & Associates, Inc.

Martin Pyykkonen - Hoefer & Arnett

Bo Tang - Barclays Capital

Barton Crockett - Lazard Capital Markets LLC

Alexia Quadrani - JP Morgan Chase & Co

Matthew Harrigan - Wunderlich Securities Inc.

Operator

Good afternoon. My name is Alexis, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regal Entertainment Group Second Quarter 2011 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 28, 2011. 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 in to our second quarter conference call. For the next few minutes, I will provide an overview of industry box office for the second quarter, an update on operational results and strategic initiatives and a brief review of industry box expectations for the remainder of the fiscal year. Following my remarks, Dave Ownby will highlight our financial results. And as always, we will conclude the call with a question-and-answer session.

After emerging from a difficult winter box office period, we are extremely pleased to report that the combination of a healthy second quarter box office, the continued success of premium format films and focus on managing the variable portion of our cost structure enabled us to generate over $130 million of free cash flow during the quarter. This is our second highest quarterly total in the last 4 years.

Industry box office receipts for our fiscal second quarter increased approximately 3% versus the same fiscal period last year. In addition to the contribution from key Tim Paul films, the overall number of successful films released during the quarter helped push the box office over the $2.8 billion mark, a new record for the second quarter. In total, 13 films released during the second quarter went on to gross over $100 million versus only 8 films in the same period last year.

Premium format films released during the quarter followed a similar 3 [ph], although 3D and IMAX box office penetration rate for some individual films released during the quarter were at or below the historical range and increase in the number of films released in a premium format and the number of screens deployed industry-wide continue to have a positive impact on box office results.

Based on our review of industry sources, we estimate that the percentage of the overall industry box office generated through premium ticket sales during the quarter was approximately 15% to 17% and was in line with, or slightly ahead of, the second quarter of last year.

From our perspective, a key take away from the second quarter box office performance is the underlying increase in industry attendance. We estimate that practically all of the second quarter industry box increase was driven by attendance gains as opposed to pricing increases.

Increased attendance clearly enables us to further leverage the portion of our cost structure that is fixed and has a positive impact on our adjusted EBITDA, margins and free cash flow, and we are particularly pleased with the industry attendance growth during the quarter.

Equally as important to us as a healthy box office environment is our ability to take advantage of increased attendance to leverage our cost structure and maximize free cash flow.

As has been the case for the last several quarters, we continued our focus on cost control regardless of the box office environment. Improvements in our film and concession margins and our ability to control the variable portion of our cost structure were key components of our adjusted EBITDA and free cash flow growth during the quarter.

We are also pleased with the progress on several ongoing strategic initiatives during the quarter. In mid-June, we completed the 3D portion of our digital rollout and now have a total of 2,773 screens equipped with RealD technology. We also added one additional IMAX screen and 3 RPX screens during the quarter, bringing our total to 57 and 14, respectively.

We continue to believe our strategy of offering films to our customers in a variety of formats is the best way to maximize box office revenue and screen utilization.

With our 3D rollout complete, our technology focus will now shift to outfitting the remainder of our circuit with digital projection equipment as of the end of the quarter just under 53% of our auditorium GUI digital projectors, and we continue to install approximately 200,000 -- and I'm sorry, 200 projectors per month until the rollout is complete in late 2012 or early 2013.

And finally, earlier this year, we announced the creation of Open Road Films, a new distribution company jointly owned by Regal and AMC. The management team at Open Road, led by Tom Ortenberg, wasted no time getting started and already has 3 films scheduled for release in the near term. We continue to believe that Open Road has a unique opportunity to fill a gap in the marketplace by marketing smaller budget films in a cost-effective manner, thereby driving more traffic to our theaters and generating a return on our capital investments. Open Road's first film, the Killer Elite, will hit theaters in late September.

Now turning to the film slate for the remainder of the year. As we look to the potential for box office success in the back half of the year, we are encouraged by several factors. First and foremost, the third quarter is off to a strong start. Despite comparisons with the record July last year, industry box office results for the first 3.5 weeks of July, led by the final installment of the Harry Potter franchise, are up approximately 4% to 5% over the same period last year.

Second, the film slate for the back half of the year includes a significant number of titles that will be presented in multiple formats. A total of 21 3D films and 7 IMAX films are scheduled for release in the second half of the year in addition to numerous 2D-only titles. We are encouraged by the fact that the slate includes movies for a wide variety of audiences.

And finally, while last year's holiday box office season was disappointing, it provides a relatively easy comparison for the upcoming fourth quarter. With the film slate that includes known franchise titles, like Twilight, Sherlock Holmes and Mission: Impossible and stories that are new to the big screen, we are optimistic about the potential for box office growth looking to the fourth quarter.

While box office success for the remainder of the year will ultimately depend on the audience appeal of each individual film scheduled for release, we believe that these factors will have a positive impact on box office in the coming months.

In summary, we're extremely pleased with recent box office results and our ability to leverage those results into meaningful growth and free cash flow. We look forward to a strong upcoming film slate and box office success for the remainder of 2011.

I would now like to turn over the presentation to David Ownby to discuss the company's financial performance.

David Ownby

Thanks, Amy, and good afternoon, everyone. Today, I'll provide some additional detail on our fiscal second quarter results and a brief update with respect to our balance sheet and asset base.

For our fiscal second quarter, we generated total revenues of $753.3 million, including $519.3 million of box office revenue, $200.2 million of concession sales and $33.8 million of other operating revenue.

On a per screen basis, our admissions revenue grew by just over 4%, ahead of the industry box office increase of approximately 3% reported by Box Office Mojo. The increase in our admissions revenue was driven entirely by gains in attendance, as our admissions revenue per patron remained flat with the same period last year at $8.75.

Our concession revenue this quarter increased by 3.9% due to the previously mentioned attendance growth and an increase in our concession per cap of 1.2%. Price increases on certain beverage items and improvements in popcorn sales volume drove our concession per cap to $3.37, the highest quarterly total in our history.

Other operating revenues during the quarter increased 5.3% over the comparable period last year, as increased attendance flow helped drive additional vendor marketing, arcade game and advance ticketing revenue. 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 free cash flow. And we are extremely pleased with our operational execution during the second quarter.

Our film and advertising expense of $273.1 million represented 52.6% of admissions revenue, an improvement of 70 basis points as compared to the same period last year. A box office that relied more on breadth than on a couple of high grossing films was the primary driver of our lower film cost, and advertising expense continued to benefit from reductions in print advertising costs.

Our 86.4% concession margin increased 30 basis points as compared to the second quarter last year, primarily as a result of the selective price increases on certain beverage items and the increase in popcorn sales volume mentioned earlier.

Total rent expense of $96.8 million grew by 2.7% in the aggregate due primarily to increases in percentage base rent associated with increased admissions and concessions revenue. And most importantly, as has been the case for the last several quarters, our focus on controlling variable costs resulted in total other operating expenses of $190.0 million, a decline of $9.6 million or almost 3.5% on a per screen basis versus the same period last year. A reduction in theater level payroll of -- pardon me, a reduction of theater level payroll, combined with modest decreases in nonrent occupancy costs, were the primary drivers of the decrease.

We are extremely pleased that our box office out-performance and record concession per cap, combined with our continued focus on variable cost control, helped generate significant improvements in both adjusted EBITDA and adjusted earnings per share, both of which were well ahead of consensus Wall Street estimates.

As for our asset base and balance sheet. Capital expenditures net of asset sales for the quarter totaled $7.6 million. Based on our development schedule for the remainder of the year, we still expect full -- we now expect full year net CapEx to be in the $75 million to $90 million range.

During the quarter, we continue to actively manage our asset base, opening one theater with 12 screens and closing 2 theaters and 29 screens to end the period with 534 theaters and 6,653 screens. In the back half of the year, we now expect to open an additional 2 theaters with 30 screens and close an additional 8 to 10 theaters with 60 to 75 screens and to end the year with approximately 527 theaters and 6,620 screens.

As with other parts of our business, we always seek to manage our asset base in a way that maximizes profitability and cash flow. Since the beginning of the second quarter last year, we have permanently closed 20 theaters and 199 screens. While these closures had a negative impact on our top line, reducing box office revenue by the -- for the second quarter by roughly $5 million, they had almost no impact on our adjusted EBITDA or free cash flow.

As always, we encourage analysts and investors to model and evaluate our business on a per screen basis. I want to emphasize that we expect to have a slightly lower screen count for the remaining fiscal quarters in 2011 as compared to the comparable quarters in 2010.

With respect to the balance sheet, we ended the quarter with approximately $195 million in cash and a total debt balance of just over $2 billion. Our adjusted EBITDA growth for the quarter, combined with the refinancing transactions we completed in the first quarter this year, had a positive impact on our debt covenant calculations. As of the end of the quarter, our leverage ratio, as defined by our senior credit facility, totaled approximately 2.7x, well below the covenant limit of 4x.

And finally, a brief note about capital allocation. Our current annual dividend of $0.84 per share or approximately $130 million in the aggregate represents roughly 60% of our average annual free cash flow for the last 3 years. At this level, our payout ratio was at the low end of our historical range, and we believe that we have sized the dividend in such a way that we maintain a healthy amount of financial flexibility.

As has been the case historically, we will continue to allocate capital in ways that we believe will best reward our long-term shareholders by carefully evaluating the alternatives available to us, including investing in future growth, strengthening the company's balance sheet and returning value to shareholders.

In closing, we are again very pleased with the results for the quarter and are optimistic regarding the potential for box office success for the remainder of the year.

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 coming from Eric Handler of MKM Partners.

Eric Handler - MKM Partners LLC

A couple of things. When I look at your total cost per screen, it looks like it was around $91,000 for the quarter, which was up less than 0.5% year-over-year. Prior 2 quarters, it was down. But when you look at it going forward, do you think you could keep those increases at a similar level of what we saw in the second quarter? And then secondly, now that you're fully rolled out with 3D screens as you continue to digitize your circuit, at what point do you start bringing in theater management systems? And how much do you think you can generate from additional cost savings from those systems?

David Ownby

And just to clarify, what costs are you including in that $91,000 per screen?

Eric Handler - MKM Partners LLC

I'm including all the costs from film rental and advertising concessions, rent, other theater and general admission -- general administrative.

David Ownby

Yes, I mean, obviously, film, rent and advertising and concession costs, those are going to fluctuate with revenue. The way we think about those over time is, they've been very flat on a 12-month basis historically, and we would expect that to continue. When you look at the rent line, obviously, that's a fixed cost. And certainly, it does move up and down slightly with roughly 5% of our rent, that is percentage base. Otherwise, it's basically a fixed cost on a per screen basis, maybe with just a flat inflationary component to it given that some of those leases have escalators that are tied to specific indexes. And then with -- in terms of other operating expenses, mean, obviously, we're very pleased with our results for the quarter on the other OpEx line as we have been for the last couple of quarters. And first and foremost, our theater managers and our operations personnel have done a great job managing our variable payroll costs, and they deserve a lot of the credit for our success this quarter. Over the past, call it 12 or 18 months, we have put some new tools in place that allow us to track and analyze payroll data at a more granular level and to use that information to schedule payroll more effectively. These tools obviously helped us flex down our payroll costs in the difficult box office environment we were in, in Q4 and Q1, Q4 of last year and Q1 of this year. But we really hadn't had a chance to put those systems to the test in a quarter with attendance growth until now. And obviously, again, we're pleased with those results. So as we move forward, our other operating expenses this particular quarter were down about 3.5% per screen. Certainly, some of those costs are tied to attendance, so to a certain extent, they will move back and forth with attendance. But we will continue our focus on managing those variable costs and, in particular, on using our payroll dollars to service the attendance that we have as efficiently as possible.

Amy Miles

And, Eric, just to follow up on the last part of your questions, as we move to a fully digital -- digitized theater versus a partial 3D or digital theater in 35-millimeter, it's hard to put a number to that today, but I can tell you where we have fully digital theaters and we have our theaters in L.A. and our theaters in New York do have -- are 100% digital as we speak and we see efficiencies in 2 ways. One on the cost side, again, running the booth from a digital perspective is less expensive than in a 35-millimeter world. But another benefit we see there is content management. So as you are able to move content through a digital theater, it's much better when you have 100% digital screen. So from that perspective, we would expect it also be able to maximize our revenues in a 100% digital world. And again, it's hard to put a number to both of those, but both those benefits are forthcoming.

Operator

Our next question is coming from the line of Alexia Quadrani of JPMorgan.

Alexia Quadrani - JP Morgan Chase & Co

Could you please provide some of the details on the pricing terms in the quarter, the 2D, 3D, IMAX driven formats?

David Ownby

Sure, Alexia. For the quarter, our 2D ticket price was $8.25, our IMAX ticket price was $15.43 and our RealD ticket price was $11.72. And as you think about what drove the fact that our ticket price was flat for the quarter, I wish I could give you a $0.01 answer, but the fact of the matter is it's several small things. First and foremost, obviously, we didn't get the benefit this quarter of mix shift that we've seen for the last several quarters. And even if you look inside that premium format bucket, which was, call it 7 -- a little under 18% of our total revenue, our box office revenue, excuse me, was premium ticket sales. If you look inside that bucket, there actually was a little bit of a shift to more 3D ticket and a little bit less IMAX ticket. Nothing dramatic there, but it did impact the overall average ticket price a little bit. You'll note there that our 3D ticket price was down about $0.15 from last year. And that's really just a function of the rollout of 3D. Last year, our 3D projectors were concentrated in larger markets that have higher ticket prices and as we rolled that out to the entire circuit and got to some of those smaller markets that actually brought the overall 3D average ticket price down just slightly.

Alexia Quadrani - JP Morgan Chase & Co

David, if you don't mind, can you give us the percent change year-over-year? I just don't know if I have those numbers for last year.

David Ownby

I do. I'll just give you the numbers for last year, and you can calculate that. It's $8.24 for 2D last year, $15.47 for IMAX last year and $11.87 for 3D last year.

Alexia Quadrani - JP Morgan Chase & Co

Okay. And then just on the 3D split for select movies that Amy referenced in her opening comments that did come in maybe on the lower end of some expectations, what's your opinion or your guys' opinions on what really was behind that? Was it a capacity issue? Was some people sort of been there done that on the 3D thing are less enthralled by it? Or do you think it was the type of movie? What do you think caused that bit of a shift?

Amy Miles

I think it was one thing, and it's always hard in a content world to try to point out various reasons when you're looking at percentages or ranges of performance. And one thing that we have seen is when a 3D picture is a family picture that, that will skew a little bit lower than the average. And when you have more of a fan boy picture, that may skew at the higher end of the average. And Transformers was a good example of that in this most recent quarter. And so I think the type of content can lead to a relative percentage performance. And it's just like -- when you think about it from a content perspective, you're going to have 2D movies that underperform or outperform, and you have 3D pictures that underperform or outperform. From a capacity perspective, when you're just thinking about Regal Entertainment Group, we had capacity to service the IMAX pictures, we have capacity from an RPX perspective, we have capacity from a 3D and we have capacity from a 2D. So I would say from our specific case, it was less -- any of the performance has less to do with capacity.

Alexia Quadrani - JP Morgan Chase & Co

Okay. And if I could just -- just one follow up, I can go back to the previous question. On the 2D pricing being flattish year-over-year, is that going to be -- should we, make that assumption going forward? Is there any reason behind, I guess, no price increase in 2D?

David Ownby

No, I think over the long term, Alexia, we still think that those 2D price increases will be right in that historical range of, I'll call it, 3% to 4%, something like that. If you look at this particular quarter, it really just came down to 2 things. One, we haven't been quite, maybe quite as aggressive with our 2D ticket price, given the benefit that we've gotten from mix shift over the last year or so. And then number two, just to drill down into the kind of a mix of the tickets that were sold, we sell several different types of tickets, adult, seniors, matinee, children's tickets, all those things. The mix held that ticket price back just a little bit this quarter as well.

Amy Miles

And I'm sorry to backtrack a little bit just to follow up on my 3D question, but the only thing I'd like to just point out as a reminder is, as we see the various ranges from a 3D perspective, remember that this is highly accretive from Regal's perspective. So at the lower end of the range, 3D has been very productive for us, and at the higher end of the range, 3D is productive for us. So again, I would just remind investors, when you're thinking about it, remember that we're using a third-party capital to finance 3D, so from that perspective, it's been very accretive from our perspective.

Alexia Quadrani - JP Morgan Chase & Co

And, Amy, if I can just follow up on that point then, do you have any idea, I know it's early, about how many 3D films we might have next year?

Amy Miles

No, I don't. That number will move over the next several months as the film slate shakes out. But I wouldn't think it would be materially different than 2011 at this point.

Operator

Our next question is coming from the line of Tony Wible of Janney.

Anthony Wible - Janney Montgomery Scott LLC

I want to follow up on an earlier question. The other cost category, I understand that you're saying some of the savings in there are variable, but I guess at the end of the day, should we expect some carry-forward benefit from the new procedures and systems that you've kind of put into place?

David Ownby

Well, Tony, I just want to be clear, the #1 driver, particularly at the portion of that cost that is variable, is attendance. Certainly, we've gotten some benefit of the things that we've done. I believe we've gotten that. We started getting that probably in Q3 of last year, and then certainly got a lot of that as attendance was lower in Q4 and Q1. And then clearly, we're pleased with this quarter's results. So we'll start to comp again some of that benefit maybe later this year, but every quarter, we'll continue to focus on how we get the most out of those variable costs.

Anthony Wible - Janney Montgomery Scott LLC

Great, and I don't know how much you can share, but can you go through some of the economics on Open Road? Kind of what kind of P&A costs they may be looking at and what kind of fees they'll be collecting, so we can kind of get a sense for how it will ultimately flow back to Regal?

David Ownby

Tony, as Open Road starts to mature, we'll talk about that a little bit more. I mean, we'd really don't want to -- don't think it's prudent to talk about each individual deal that Open Road does because quite frankly they're all different. What I can tell you at this point about those deals is they all fit into the framework and into the risk profile that we set for Open Road. And again, as that venture starts to mature, again, Amy said they have their first film coming out in very late September the last week of the quarter this year, we'll talk more and more about how to model that and what impact it has in the financial statements. If you do remember, on the last call, we did talk a little bit about how we could account for it, and we said that to the extent that we get cash out of Open Road, whether that's in the form of a dividend or other payments, we'll include that in adjusted EBITDA to the extent that we just record our share of their equity losses but -- that we don't get in -- equity profits or losses, sorry, that we don't get in cash, then that will be down below the line in that other net line in the financial statements.

Anthony Wible - Janney Montgomery Scott LLC

Right. And I guess as their first film is coming out in the coming quarter, I'd anticipate some kind of marketing spend ahead of them being able to really get the receipts on that, which will probably fall more in the fourth quarter. So I guess I'm going to get a sense on the film that's coming out, should we just anticipate it to be small enough that we could say it's not really material and that we shouldn't be baking anything into the model?

David Ownby

Yes, if you kind of look at that other net line over the last 4 quarters maybe and use that as a guide, then certainly from a modeling perspective, I don't think you're -- I don't think that will hurt you any.

Operator

Our next question is coming from the line of Barton Crockett of Lazard.

Barton Crockett - Lazard Capital Markets LLC

Okay, great. I wanted to ask a question about the working capital adjustments in cash flow from operations. What was behind the big kind of benefit you had there? And is there some type of payback in the second half? Or is this just kind of a recovery of something we saw before?

David Ownby

If you look at our pattern of working capital over time, Barton, what you typically will see is that we build working capital in Q2 and Q4 and we typically have flat or down working capital in quarters 1 and 3. With the recent refinancing transactions that we did or before we move the portion of our debt from bank debt into the high yield bonds, that actually makes that pattern. It exacerbates it a little bit. So certainly, I would expect that pattern to continue, but a lot of that working capital change is just timings. For example, if the box office is very strong or very weak for the last 3 or 4 weeks of a quarter and that affects how much film payable we have at the end of a particular period, that can change that working capital number. I would encourage you to always evaluate that working capital on annual basis where typically it's very -- it doesn't fluctuate very much.

Barton Crockett - Lazard Capital Markets LLC

Okay. So this year, we'll take that into account. The -- I was also wondering about the screen count. So you guys have had declines; average screens down 1% or so this quarter year-over-year. Any sense of whether the industry is following you in that trend? Are we starting to see net declines industry-wide? I know the other kind of private big chain, AMC's reducing screen count, not much growth at Cinemark, some of the smaller chains may be challenged to convert to digital, do you see a tipping point towards reduced screen count? Or are you kind of different than the rest of the industry, do you think?

David Ownby

You know, Bart, it's always difficult to forecast that number. I will tell you that based on the industry data that's out there and to be fair, you have to estimate a little bit to get this number, so it's always hard to get it until NATO reports for screen count at the end of the year. But based on the rent track data that I've looked at, I would say that the screen count for the industry this quarter is probably between flat and down 0.5%

Operator

Our next question is coming from Bo Tang of Barclays Capital.

Bo Tang - Barclays Capital

Great. Just one question on the 3D issue. In the back half of this year, and you mentioned in your opening remarks, there's more 3D products out there and they will be playing on more 3D screens. So is it fair to say the overall 3D pie is growing? And granted, I know that's based on how certain movies do, but I mean, is that a fair statement, do you think?

David Ownby

Bo, if you don't mind, I will answer that. I think you hit the right point, which is it ultimately depends on how each one of those individual films perform. And then this is just one statistic, but if you look at the second quarter this year, I believe there were 9 films available in a premium format, whether it was 3D or IMAX or both. Those films accounted for about 45% of the box office. Last year, in the second quarter, even though there were fewer films in those formats, I believe there were 7 films in the second quarter last year in those formats, those 7 films also accounted for 45% of the box office. So I think the point you made is exactly the right one, which is it ultimately depends on how each individual film performs.

Bo Tang - Barclays Capital

Got it. Great. And then just one question on -- I was looking at -- based on your fiscal quarter, the industry was up around 3%, and on a per screen basis, you guys were up 3.8%. Could you just talk about some of the drivers that drove that difference between your performance versus the industry?

David Ownby

Sure. You know, Bo, we've talked a lot in the past about our geographic footprint and how that impacts, how we compare it to the overall industry number. And certainly, we were pleased to see that some of those markets or some of those states, I guess, that have lagged the rest of the country and box office performance in the past certainly did a lot better this quarter. California, in particular, was 30 to 60 basis points ahead of the rest of the country. And the bigger markets that were in New York and Florida also perform very well. So we talked a lot about that in the past and how it affects us, and that's not necessarily something we can control, but it is something that we monitor and watch and, in this quarter, that worked to our benefit.

Operator

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

Matthew Harrigan - Wunderlich Securities Inc.

Amy, I was curious, just a bit of a answer, I guess, to a former question, but even you, who are one of the better operators, have some dis-economic [ph] theaters, I guess the roll off there for the entire industry really depends on how box office does and certainly how the economy does and then the real estate market and leases. I mean, do you think there's a lot of dead capacity, so to speak, when you look across the entire industry that's bound to roll off over time and take the screen count down? Or do you think that things are relatively healthy now in terms of all the premium that's been done?

Amy Miles

I think there's always --and if you think about it a little bit from the perspective that a lot of these theaters that were put in place were put in -- I mean, that are stadium seating today were put in place in the build-out period as, call it, '95 to 2000 period. So there's going to be some natural replacement. And I think exhibitors like Regal who spend a lot of CapEx and keeping those assets in good shape, those are going to be good for the long term. But where you have other smaller, not smaller chains, I don't mean it that way, but smaller theaters that over time -- and you think you're getting close to that natural cycle, just from a time period perspective, those are going to continue to close and that will benefit the industry. And again, we're just in a place where we can continue to keep our existing assets fresh and as well as invest new capital in new theater development over time.

Matthew Harrigan - Wunderlich Securities Inc.

And then lastly, could you talk briefly? I haven't [indiscernible] there's been too many huge headlines, but just premium VOD because you didn't go as much into it as you did in the last conference call?

Amy Miles

Yes, I guess if we go back several months ago, we did have certain studios that -- I'm just going to say launch what was the initial test of the premium VOD product. And if you remember, the films were available in the home on a limited timeframe, and the price point was about $30. And the theatrical window for those films was give or take 60 to 75 days. Public data regarding the results of that test isn't available, so it's hard for us to comment on the financial aspect of the premium VOD test. But I can say that based on the structure of that initial test, and when I'm thinking of structure, I'm thinking the marketing around the test, the price point, the films that were included, the theatrical window. I do not believe that the test had a negative impact on our box office. That being said, we're going to -- we continue to believe that a healthy theatrical window is best for exhibition and best for the studios. For the long term, we'll continue to monitor the theatrical windows, but it's hard to say this last test had any type of impact from a negative perspective on our box office.

Operator

Our next question is coming from the line of Martin Pyykkonen of Wedge Partners.

Martin Pyykkonen - Hoefer & Arnett

David, just curious, almost more of a philosophical question, the attendance being up 2.6% and I think it's pretty meaningful for all of the nay sayers about people going to the box office. Given the tight schedule this year and that obviously May, June and July are always tighter for the summer season, do you think it was almost tighter this year and one films type [ph] of another from a standpoint of just box office fatigue? In other words, could attendance have been even better if there was a little more spread? And kind of part b to that, do you think the studios think that from what you discuss with them? And any chance of spreading that out a little bit going forward including next year?

Amy Miles

From our perspective, it's always best on the exhibition side to have films spaced throughout the year. We'd like to have healthy tent poles in March just as we have healthy tent poles in May, June and July. So from our perspective, we play all the films, so we have the benefit of a portfolio approach, so our maximized -- our revenues are maximized. But you always do feel like you wish you could see a little bit more time in between certain films just because you believe they would have longer legs and greater capacity to generate revenue. But again, the studios, too, are focused on key release dates.

David Ownby

And Martin, just as a follow up to that, we are looking to hopefully take advantage of some of that, particularly with our Open Road investment where, if you look at the films that we currently have acquired or that Open Road has acquired and they're scheduled for release, those 3 release dates are September of this year, January of next year and April of next year.

Martin Pyykkonen - Hoefer & Arnett

Yes, okay. And then just looking forward on ticket pricing, I know that's been historically. And I think on your last call, you said that you don't go back on history so much, but the fall, and the spring, early summer ticket price increases. How could you -- attendance was up and ticket pricing was kind of flattish. Are you looking at keeping ticket pricing flattish in the fall period coming up?

David Ownby

Yes, the ticket price dynamic this particular quarter, Martin, was more a result of other mix type things as opposed to our actual pricing policies. Over time, over 12-month period in particular, we still would expect our ticket price to kind of be up in that historical range of around 3% or so on an annual basis.

Martin Pyykkonen - Hoefer & Arnett

Okay. And then lastly, I know you got the question earlier kind of the digital projection side and cost savings, very strong free cash flow in the quarter. But any of it that you can measure coming from the reduced labor cost in the boost that you already have digital at this point? Is there anything meaningful do you think in that kind of [indiscernible]?

David Ownby

Yes, again, given that we have so many complexes today that are still operating in a dual world, that's partial 35 and partial digital, that number is probably limited for this quarter. I wouldn't say it's 0, Martin, but a big part of that payroll savings really has a lot more to do with, again just the tools that we put in place to help our field personnel and again most importantly their willingness to go out and execute and do a good job and as they schedule payroll.

Martin Pyykkonen - Hoefer & Arnett

And you still expect to be all-digital by the end of next year, 2012 or early 2013, is that...

David Ownby

That's correct, Martin, that is correct.

Operator

Our next question is coming from the line of Joe Hovorka of Raymond James.

Joseph Hovorka - Raymond James & Associates, Inc.

Actually, most of my question's been answered, but I didn't catch the 3D mix in the quarter versus the third -- the second quarter last year?

David Ownby

Sure, Joe, our -- and remember, we disclosed that as all of the premium formats together. And that number this year was 17.7%, and last year, it was 17.6%.

Operator

Thank you. At this time, I'd like to turn the floor back over to management.

Amy Miles

Thank you very much for dialing in to our second quarter call. It was a great quarter, and we look forward to speaking with you guys next quarter. Bye-bye.

Operator

Thank you. And that does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

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