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Regal Entertainment Group (NYSE:RGC)

Q4 2011 Earnings Call

February 13, 2012 05:00 PM ET

Executives

Amy Miles - CEO

David Ownby - CFO

Analysts

Ben Mogil - Stifel, Nicolaus

Barton Crockett - Lazard Capital Markets

James Marsh - Piper Jaffray

Martin Pyykkonen - Wedge Securities

Eric Handler - MKM Partners

Townsend Buckles - JPMorgan Securities

Bo Tang - Barclays

Marla Backer - Hudson Square

Eric Wold - B. Riley

Matthew Harrigan - Wunderlich Securities

Jim Goss - Barrington Research

Joseph Hovorka - Raymond James

Tuna Amobi - Standard & Poor's

Operator

Good afternoon. My name is Maddy (ph) and I will be your conference facilitator today. At this time I would like to welcome everyone to the Regal Entertainment Group’s Fiscal Fourth Quarter and Full Year 2011 Earnings Release Conference Call with our host 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 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 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 fourth quarter conference call. For the next few minutes I will provide an overview of industry box office results, some operational and strategic highlights for 2011, a brief review of the 2012 film play. Following my remarks David with highlights our financial results and as always, we will conclude the call with a question-and-answer session.

The fourth quarter of 2011 presented the industry with a challenging box office environment. Despite over $280 million of revenue generated by Twilight: Breaking Dawn Part 1 and a slight uptick in the box office during the historically busy week between Christmas and New Year’s, industry box office generally underperformed expectations and declined by approximately 7% versus the same period last year.

Despite the challenging box office environment, we continue to focus our efforts on maximizing free cash flow and generating meaningful returns for our shareholders. To that end I'm pleased to report the following highlights from both the fourth quarter and fiscal 2011.

First and foremost, our focus on effectively managing the variable portion of our cost structure continued to have a positive impact on our operating results as evidenced by a reduction in other operating expenses of approximately $5 million in the fourth quarter and almost $40 million for the fiscal 2011 year.

Effective cost control combined with our closure of 127 unproductive screens in the last 12 months helped us achieve adjusted EBITDA margin growth of 40 basis points in 2011 despite the difficult box office environment.

Our roll out of premium screens also benefited our bottom line in 2011. While the percentage of total box office revenue generated by premium ticket sales has fluctuated and will likely continue to fluctuate on a quarterly basis, a broader view of industry data indicates that the premium format has evolved into a very stable portion of our business.

We estimate that premium ticket sales accounted for approximately 18% to 19% of industry box office in 2011, just shy of the 20% generated last year despite a difficult comparison with Avatar and Alice in Wonderland in early 2010.

In addition to our premium auditorium rollout, we also made significant progress with our conversion to digital cinema in 2011. As of year-end over 4,700 of our screens were equipped with digital projection systems and just over 50% of our buildings were fully digital. We are already experiencing operating and content management efficiencies as a result of the digital conversion and we look forward to completing the rollout by the end of 2012.

At the concession stand, our per caps increased by almost 5.5% for the fourth quarter and almost 3.5% for the fiscal year. We are particularly pleased that these gains were driven primarily by increases in volume as opposed to price and, furthermore, that items introduced as part of our expanded food menu accounted for over $0.015 of the per cap gross for the year, despite availability at only a limited number of locations. We are encouraged by the early results from our expanded food menu and expect to introduce some or all of these items at additional locations in 2012.

And finally our film distribution joint venture, Open Road Films is off to a great start. To date Open Road has released two films, Killer Elite which generated a total gross of over $25 million last year and The Grey, which opened as the No. 1 film domestically three weeks ago and has since generated a cumulative growth of almost $43 million. And we expect both films to generate a profit as they move through the downstream distribution channels.

In addition, an agreement was finalized in late 2011 under which Open Road will provide distribution services for three to four film district titles in 2012 in exchange for a distribution fee. The agreement allows Open Road to supplement their release schedule without deploying additional capital and effectively leverage their existing overhead. We are pleased with Open Road’s early success and look forward to the films they have scheduled for release for the remainder of 2012.

In summary, we are extremely pleased that our operational execution in 2011 helped us generate free cash flow of over $286 million, an increase of 46% as compared to 2010 and furthermore, that we continue to use a portion of that free cash flow to generate a meaningful return for our shareholders. Including our annual dividend of $0.84, our shares produced an all in return of over 8% in 2011. That’s almost four times the return generated by the S&P 500 for the same time period.

Now let me turn to the film slate for the remainder of the 2012 fiscal year. The year is off to a great start at the box office. For the first 6.5 weeks of the year, industry box office receipts increased approximately 19% versus the same period last year thanks to a strong carry over from key holiday films and a string of outperforming films in the last several weeks.

With several high profile titles still to come, including Disney’s John Carter, Dr. Suess’ The Lorax, and the first installment of The Hunger Games, we are optimistic about the prospect for industry box office and attendance growth in the first quarter.

Looking ahead to the remainder of 2012, we are encouraged by what appears to be a promising line-up of high profile tempo films that are evenly spaced throughout the release calendar. The summer movie season will begin and end with two highly anticipated super hero films: Marvel’s The Avengers on May 4, and the final Batman film from director Christopher Nolan, The Dark Knight Rises in late July. In between the slate is headlined by Battleship and Men in Black III leading up to Memorial Day weekend with Pixar’s Brave in mid-June and The Amazing Spiderman during the July 4th holiday.

And the holiday release schedule is equally exciting with the twenty-third James Bond adventure, Skyfall, in early November, the conclusion of the Twilight franchise on Thanksgiving weekend, and Peter Jackson’s The Hobbit in mid-December.

The broader film slate for the remainder of the year includes content for all audiences and approximately 35 films that will be presented in a premium format. 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 are optimistic that these factors will have a positive impact on box office results in 2012.

In summary, we are again extremely pleased with our operational execution during the past year and the resulting growth in adjusted EBITDA margins and free cash flow, as well as the all in return of over 8% generated for our shareholders during the year.

I would now like to turn over the presentation to David to discuss the Company’s financial performance.

David Ownby

Thanks Amy and good afternoon, everyone. Today I’ll provide some additional analysis of our fourth quarter results and a brief update with respect to our balance sheet and asset base.

For our fiscal fourth quarter we generated total revenues of $613.9 million including $414 million of Box Office revenue, $159.3 million of concession sales and $40.6 million of other operating revenue. Our admissions revenue this quarter decreased 8.3% on a per screen basis as a result of a 7.6% decline in attendance combined with a 2.3% reduction in our average ticket price.

The reduction in our average ticket price was largely due to the mix of tickets sold during the quarter while a couple of high-profile premium format films were successful, most notably Puss In Boots and Mission Impossible Ghost Protocol. Premium ticket sales overall accounted for only 17% of our Box Office revenue, as compared to 24% in the fourth quarter last year.

Our concession revenue declined by only 2.7% as the previously mentioned decline in attendance was partially offset by a healthy 5.4% increase in our concession per caps. A family-fit-friendly film slate and the success of our expanded food menu at select locations helped bring more customers to the concession stands and resulted in a 3.6% increase in beverage volume, a 5.3% increase in popcorn volume and a 6.1% increase in food volume during the fourth quarter.

Other operating revenues increased 3.8% as compared to the same period last year driven primarily by modest increases in revenues from National CineMedia, our vendor marketing programs and our gift card and discount ticket programs.

In a difficult Box Office environment it is imperative that we effectively manage our cost structure in order to maximize free cash flow, and as Amy mentioned earlier, we were extremely pleased with our fourth quarter operational execution.

Our film and advertising expense of $210.9 million represented 50.9% of admissions revenue, an improvement of 50 basis points as compared to the same period last year.

A box office that relied more on breadth than on a few high-grossing films was the primary driver of our lower film cost, and our advertising expense continued to benefit from reductions in print advertising costs.

Our 86.3% concession margin decreased 40 basis points as compared to the fourth quarter last, due to a shift in the mix of products sold at the concession stand and to a much lesser extent the roll out of the expanded food menu at select locations.

Total rent expense of $95.5 million declined by 1.1% in the aggregate due primarily to theater and screen closures in the last 12 months. On a per-screen basis rent expense increased by 0.4%. And as was the case throughout 2011, our focus on cost control continued to benefit the bottom line.

Total other operating expenses of $183.4 million declined by $5.4 million or 1.4% per screen. We are obviously pleased that our management and field personnel reacted to the Box Office environment in a timely manner. Their efforts, which led to a 7% reduction in theater-level payroll, were the primary driver of the decrease in our other operating expenses.

Despite the difficult box office environment in the fourth quarter we are extremely pleased that our operational execution helped generate adjusted EBITDA of $99.4 million and adjusted earnings per share of $0.10, both of which were ahead of Wall Street consensus estimates.

As for our asset base and our balance sheet, capital expenditures net of asset sales for the quarter totaled $22.3 million, bringing our total for 2011 to $66.7 million. We continued to actively manage our asset base during the quarter, opening two theaters with 31 screens and closing three theaters with 22 screens to end the year with 527 theaters and 6,614 screens.

Based on our development schedule and outlook for 2012, we expect full year capital expenditures to be between $105 million and $120 million. We expect to open five to seven theaters with 70 to 100 screens, and close 8 to 10 theaters with 60 to 80 screens, which would result in ending counts of approximately 524 theaters and 6,629 screens for 2012.

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 our fourth quarter last year, we have permanently closed 19 theaters and 147 screens.

While these closures had a negative impact on our top line, reducing box office revenue for the fourth quarter by roughly $3.1 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 and want to emphasize that we expect to end the first quarter of 2012 with approximately 524 theaters and 6,588 screens.

With respect to the balance sheet, we ended the quarter with over $250 million in cash and a total debt balance of just over $2 billion. The debt transactions that we completed in early 2011 continue to have a positive impact on our debt covenant calculations and as of the end of the year our leverage ratio as defined by our senior credit facility totaled approximately 2.5 times, well below the covenant limit of four times.

With our current capital structure and interest rate swap portfolio, we expect our interest expense to be approximately $142 million in 2012, $36 million in both the first and second quarters, and $35 million in the third and fourth quarters.

In closing, we are again very pleased with our results for the fourth quarter and 2011 and are optimistic regarding the potential for Box Office success as we move forward into 2012. This concludes our prepared remarks. Operator, please open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is from the line of Ben Mogil with Stifel, Nicolaus. Please go ahead.

Ben Mogil - Stifel, Nicolaus

So just a couple questions, on the CapEx number, obviously a lot higher than what you ended up doing in 2011 and if we go back to 2011 I think almost every single quarter you ended up rationing down the number. How firm is that 105 to 120? How much wiggle room do you have in terms of the commitments you’ve made and how far along you are in the process?

David Ownby

Well, Ben, about half of that number, remember, is what we would call kind of maintenance-type CapEx.

Ben Mogil - Stifel, Nicolaus

Sure.

David Ownby

It’s fairly set. The other half really is more for new theater construction, and that really is dependent on the projects that we’re involved in around the country in different retail centers. So based on what we know today, certainly we feel like that’s where we’ll end up for 2012, but going forward, those projects certainly could be delayed or the timing for those could change.

Ben Mogil - Stifel, Nicolaus

And was your maintenance CapEx number, I mean I think generally between 1.5% and 2% of box office is a reasonable maintenance CapEx range. It was your maintenance CapEx this year kind of in that range though?

David Ownby

Yes. We think about it on a per-screen basis, Ben, but it’s kind of $8,500 per screen is what we’ve averaged over time.

Ben Mogil - Stifel, Nicolaus

And you kept to that in 2011?

David Ownby

Yes. That’s correct.

Ben Mogil - Stifel, Nicolaus

So then...

David Ownby

Just one clarification there Ben...

Ben Mogil - Stifel, Nicolaus

Yes, sure.

David Ownby

We probably use a broad definition of maintenance CapEx; that includes everything from replacing carpet and packing holes in the wall all the way to making sure that our IT systems are up-to-date in the theaters. So that’s a broad definition.

Ben Mogil - Stifel, Nicolaus

Okay. And then sort of on that, maybe you can talk about the overall build environment, not just with you guys but just the whole industry. Are you still seeing well below industry levels of build?

David Ownby

You know, Ben, for 2011 based on the Rentrak data, it appears to me that the screen count for the industry was probably flat to maybe just slightly down. As we look ahead, we don’t see a rush to build, but it does start to feel like things are picking up a little bit. I wouldn’t say we’ll get back to what we would call normal anytime in 2012, but certainly it does look like it’s going to pick up a little bit.

Ben Mogil - Stifel, Nicolaus

Okay. And then last question, the fourth quarter obviously across the board was weaker than the original expectations. When you talk to the studios sort of on a post-mortem and without studio-specific, is there any kind of feedback that you can share about what you think is working, what isn’t working? Because certainly I get the sense that they were surprised by the magnitude of the erosion in 4Q as well.

Amy Miles

Yes. I think the only thing that I will comment there, Ben, is that I think there was some disappointment in hindsight obviously with individual picture performance. But I think when some of the dates were originally scheduled for some of the pictures and then you had movement in film dates, what happened, when you think about it, is you had a lot of weekends from a scheduling perspective, Thanksgiving comes to mind, where it was primarily at that time the box office was dominated by kids pictures. And then as we moved into the holiday season, and I’m thinking more than closer to the Christmas week where you had Mission Impossible and Sherlock, again, going after similar audiences. So I guess the theme from the studios was more on maybe we can do a better job with scheduling more than it was any other kind of specific item from a film production perspective.

Ben Mogil - Stifel, Nicolaus

And when you look at this year for the dates that haven’t yet been totally firmed, are you seeing a little bit more religion, if you will, by the studios around that? I mean certainly I know Lionsgate is just sort of mentioning that a lot of people are clearing away from Hunger Games just to avoid scheduling conflicts but that’s not a very busy weekend in general. But when you get to the really busy time periods of the year, are you seeing a little bit more thoughtfulness around the scheduling?

Amy Miles

Well, as we look at it today, it feels better when you’re looking at the schedule and you can see how the pictures are spaced over the summer holiday season and then again over the Christmas season. So from that perspective, as we stand right now, I do think there is better spacing with respect to film product.

Ben Mogil - Stifel, Nicolaus

Okay.

Amy Miles

More evenly spaced.

Ben Mogil - Stifel, Nicolaus

I think that’s it for me. Thank you very much, guys.

Operator

Thank you. Our next question is from the line of Barton Crockett with Lazard Capital Markets. Please go ahead.

Barton Crockett - Lazard Capital Markets

Okay. Great. Thanks for taking the question. I was wondering about the Admissions revenue per-screen cost down 8%. I think the industry number on kind of a weekly basis that corresponds to Regal might have been more like 6%. So a little bit of a variance there and I was wondering if you could discuss what drove that variance?

David Ownby

Sure, Barton. A couple of things there. One, I’m not sure which source you’re using there. I think we typically look to Rentrak as being maybe the most accurate and it shows down 7%...

Barton Crockett - Lazard Capital Markets

Okay.

David Ownby

Out here, so that’s one end of the equation I guess. And really on the other end of the equation, if you really think about our circuit, you kind of have to think about our circuit in two buckets. We have the IMAX screens, which play a subset of the product, and so they’re very dependent on just a few films every quarter. And while in practically every quarter, we would expect the IMAX screens to be drivers of outperformance that just really wasn’t the case this quarter. In Puss in Boots and Mission Impossible: Ghost Protocol both fared fairly well in the IMAX format, but there also were a couple of really key misses there on the IMAX screens. So if you look at our circuit absent those IMAX screens, I think we were down just a little bit over 7% per screen, so just a little bit off that Rentrak number. So the primary difference you see there relates to that underperformance on the IMAX screens. And again, over time, this quarter notwithstanding, we would expect those to be drivers of outperformance, not underperformance.

Barton Crockett - Lazard Capital Markets

Okay. And then on the CapEx outlook, could you just update us when you reported the number for this year, its CapEx net of proceeds from dispositions and you’re guiding next year I think just CapEx. Can you just talk about dispositions kind of inflow wise in 2011? And is there any reason to think of 2012 as being more or less or about the same as 2011 in terms of proceeds from dispositions?

David Ownby

Yes, that number I gave you, $105 million to $120 million, that’s a net number, Barton.

Barton Crockett - Lazard Capital Markets

Okay.

David Ownby

We expect that to be the net number. Our proceeds in 2011 were about $20 million, but that that may be a little misleading. There was a couple in there that probably were a little bit unusual so I would not expect it to be that high again.

Operator

Thank you. Our next question is from the line of James Marsh with Piper Jaffray. Please go ahead.

James Marsh - Piper Jaffray

A quick question on large formats. I was wondering if could give us an update on the total IMAX screens you have deployed at present, as well as the total RPX screens? And I was just wondering could you give us some sense for what those per-screen averages look if you compared the two? Then just lastly related to that, what’s your expectations for screen growth in those formats for 2012?

David Ownby

Sure, James. At the end of the quarter, we had 66 IMAX screens and we had 17 RPX screens. We’ve talked about our commitment to IMAX at this point is for 77 screens. I don’t think we’ll get quite all the way there in 2012 because a few of those screens are in new build theaters that are scheduled out past 2012, but certainly I’d expect us to get in the low 70s in 2012. And in terms of RPX, I think we’re looking to add another I’ll call it 15 to 20 in 2012. We really haven’t disclosed a lot of per-screen numbers for IMAX or RPX.

In terms of how they relate to each other, remember, the IMAX again, like we just talked about on the last question, is somewhat governed by the films that are available in IMAX. So in a quarter like this one where a few of the IMAX films maybe underperformed a little bit, those screens suffered by comparison. And in this particular core, the RPX screens on a per-screen basis actually out-grossed the IMAX screens. But that’s not the normal metric. Normally in most quarters, the IMAXs are out-grossing the RPX, but not by a significant amount.

James Marsh - Piper Jaffray

Okay. And then just a follow-up question on film rental costs in the first quarter. Looks like you’ve got a pretty broad offering doing well so far in the first quarter. You had some holdover films doing well. How should we look at that film rental as a percentage of revenues in the first quarter? I think last year, that did 49.7% or so, but could you beat that this year with lower advertising and that mix of films in the first quarter?

David Ownby

You know I think that was maybe one of our two lowest quarters ever in terms of film rent for the first quarter last year. So duplicating that will be a tough effort. Assuming that we have some box office growth and depending on how the film slate plays out, then that’s a pretty tough comparison for us, James. Certainly I’m hopeful that we’ll be able to continue to manage that cost in an effective way, but if you really think about what drives that number its two things. One, it’s the overall success of the box office. And two, it’s the concentration at the top of the box office. So to the extent either of those metrics moves higher, then certainly that’s going to affect our film costs in Q1 of 2012.

Operator

Thank you. Our next question is from the line of Martin Pyykkonen with Wedge Partners. Please go ahead.

Martin Pyykkonen - Wedge Securities

Okay, thanks. To follow up on the RPX question for either of you, just another way to kind of slice at it, in terms of your premium format, next I’m wondering is RPX going up as a percentage of that maybe on a same-screen kind of basis? I’m just trying to get at least a qualitative feel if you’re pulling in more traffic overall and that’s becoming a bigger piece of that bucket. And then secondly, kind of M&A focus, you mentioned not sort of a rush to build, but maybe things a little bit better. And David, I think you both mentioned 2,500 to 3,500 screens that might be appealing or attractive that could be consolidated. Any update on that number? And I guess the second part of that question, if that’s really the right number, is there a real top tier in terms of financial attractiveness here that you’ve identified that might be say a small percentage of the number but much more appealing than the rest of the group? Just trying to get some color on that as well. Thanks.

David Ownby

Sure, Martin. I’m not sure I have a good statistical answer for you on the RPX screens. But certainly we’re very pleased with the traffic that we see there. And remember, the way that model works, it’s not necessarily dependent on driving additional traffic to the theater; it’s more dependent on moving an existing customer up to a higher profit point, and we’ve been very pleased with those results so far. And I think the best statistic I can give is that we’re planning to install 15 more in 2012. That means we think they’re working.

Martin Pyykkonen - Wedge Securities

Okay.

Amy Miles

And Martin, just a follow-up with respect to the M&A environment. We said if you look at the universe of opportunities in the what I will call regional players, you would size that somewhere between 2500 and 3500 screens. And I can’t point to a circuit today that we would say would be a best fit, but I can tell you what we would be looking for is the consolidated acquisition that we executed in 2008 is probably a good example of the profile of theaters that we find very attractive. The theater base was about 95%, 96% stadium. The assets had an average life of 6%. The assets were located in markets where we thought we had demographic opportunities going forward and growth opportunities going forward. We were able to execute that acquisition at an accretive multiple.

So a high-quality asset base with demographics that support a growth profile going forward would be the type of asset that we would look for. And just when we look out there and say okay, if you tried to size that regional screen opportunity, where would that be? That’s how we calculated that 2,500 to call it 3,500.

Martin Pyykkonen - Wedge Securities

Yes. So that all makes sense. I was just trying to color on whether it’s a very small subset of that that is say really very attractive to you and the rest are kind of in the middle ground or if it’s fairly even spread?

Amy Miles

Yes, I don’t think so. We tried to call what wouldn’t be an attractive asset to us outside of that number. So that 2,500 to 3,500 are all acquisitions that at the right price we feel like were something we would execute.

Operator

Thank you. Our next question is from the line of Eric Handler with MKM Partners. Please go ahead.

Eric Handler - MKM Partners

First, when I look at your cost structure for 2012, you said there’s still some efficiencies that you think you can manage from having a more digitized circuit. How much do you think you could actually squeeze out? And where do you think you can squeeze out those cost-efficiency savings?

And then secondly, you guys left your dividend alone. You said previously that you like to have four quarters worth of the cash dividend on hand, so I calculate over $100 million of excess cash on hand. Why not boost the dividend a little bit?

David Ownby

Hey, Eric. First on the digital efficiencies. We haven’t really put a number to that and I will say it’s certainly we’re glad to have those efficiencies. It’s not really been the primary driver of what you’ve seen happen in our cost structure over the last 12 months. That driver has been more our efforts to make sure our field personnel have the right information, and in turn, their use of that information to properly schedule payroll. So the way I’ve talked about that is that number for digital efficiencies is probably more than a rounding error, but it’s certainly not a game-changer by any stretch of the imagination. But we’re certainly happy to have those efficiencies.

And then in terms of the dividend, certainly you’re right; we do have a healthy amount of cash here on the balance sheet as of the end of the year. Remember, if you think about how our cash profile looks throughout the year is that typically we give back some working capital cash in Q1 and Q3 and we build cash in Q2 and Q4. So I don’t feel like we’re really pressed to make a decision at this point and so when you see that cash balance, it may be a little bit misleading in terms of what decision we could actually make.

Operator

Thank you. Our next question is from the line of Townsend Buckles with JPMorgan. Please go ahead.

Townsend Buckles - JPMorgan Securities

Can you give the breakout of ticket pricing growth in Q4? And for 2012, what your expectations are for core increases in premiums?

David Ownby

Sure. If you look at the different formats, Townsend, our 2D ticket price in Q4 was $8.19, which is up just a couple of pennies versus Q4 of last year. Our IMAX ticket price was $15.47. Again, that’s down about $0.30 versus Q4 of last year. And our 3D ticket price was $11.79. I think that’s about $0.06 down versus Q4 of last year.

All three of those, Townsend, if you look at all the different categories, the family audience, there were a lot of films for the family audience in Q4 and even though some of those films on an individual basis may have underperformed that audience as a whole actually grew fairly significantly in Q4. But when I look at our ticket statistics in each category, more tickets were sold at children’s, and in some cases, at matinee prices than at the adult evening ticket price, as compared to Q4 of last year, and that’s why you see that more or less static ticket price for the quarter in the different formats.

When we look ahead, we don’t really think about the future any differently than we have the trend line for the past, Townsend. We think we probably have ability to increase ticket prices kind of in that historical range, 2.5% to 3% per year.

Townsend Buckles - JPMorgan Securities

Okay. And anything different with the premiums for 3D or IMAX?

David Ownby

No, I think as we said previously, we’ll look to keep those dollar value of those premiums fairly constant and continue to take opportunities where we have those to increase the base or the 2D ticket price underneath that.

Townsend Buckles - JPMorgan Securities

Okay. And then just finally anything to keep in mind when we model out Open Road in Q1 and going forward? Can The Grey provide some earnings in the quarter? Or is that going to be more downstream? And did the distribution agreements change how your accounting is going to function?

David Ownby

Yes, we’ll tackle those separately. If you think about the events for Open Road in the first quarter, they basically have I guess three or four events. One, they had the DVD release for Killer Elite in January. There was also the theatrical release for The Grey, which is a film that was acquired by Open Road. They also have another release in March, Silent House, it’s strictly a service deal for Open Road. And then obviously they have their ongoing G&A. So when you put all those together, I don’t expect that number to be meaningful one way or the other to earnings in Q1. And then as you look ahead from that, then certainly we’re hopeful that Open Road will continue to pick the right films and make the right deals and that they’ll, over the long-term, generate a profit for us.

Operator

Thank you. Our next question is from the line of Tony Wible with Janney Montgomery Scott. Please go ahead.

Tony Wible - Janney Montgomery Scott

I was hoping you could comment on any correlation you guys are starting to see between ticket pricing and concession spend? And I guess where I’m going is if you look back to 2010, you had stronger ticket pricing and a little bit weaker concession sales per patron and you saw kind of the reverse this year. Is that just coincidental? Is that a function of the concession changes? I was hoping you could speak to that, and then I have another question.

David Ownby

I think, Tony, from our perspective, it’s largely coincidental. First and foremost, I think we’ve always said that what really drives concession stand is the genre of the film. So Q4 is a great example. Again, you had a big family audience in Q4, and as a result, our per-caps were very healthy for the fourth quarter. And that’s really been the case historically from what we’ve seen. And it has a lot more to do with the genre of the film and a lot less to do with any other pricing strategies that we’re taking either at the box office or at the concession stand.

Tony Wible - Janney Montgomery Scott

Sure. And then I don’t know how you would capture this, but is there anything beyond just the line-up timing that we saw in 4Q and kind of into 1Q that would just explain this extreme swing and kind of volatility where certain films that look promising kind of missed the mark and then you have on the opposite side some I guess sleeper hits, if you will.

Amy Miles

Yes. I think that’s why a lot of times when we talk about our business, we always say it’s best to look at it over at least a trailing 12-month basis. Being a content-driven business from that perspective, you do a lot of times see a lot of quarterly fluctuation, but over the longer-term, steady growth in our business. So again, we’ve already talked about how there was probably some cannibalization due to scheduling in the fourth quarter. But aside from that, it’s hard to say that there’s been any kind of really big change in our industry that would create a down fourth quarter and a substantial up first quarter other than just the commercial appeal of the product.

Tony Wible - Janney Montgomery Scott

Great. And then lastly do you have the 3D screen count at the end of the quarter?

David Ownby

I believe it was 2,767, Tony.

Operator

Thank you. Our next question is from the line of Bo Tang with Barclays Capital. Please go ahead.

Bo Tang - Barclays

Great. Thank you for taking the question. Just one for David and this is to follow-up to Townsend’s question. When asking about the 2% to 3% growth rate in ticket prices, is that referring to overall ticket prices, David? Or was that more referring to the base ticket prices?

David Ownby

No. That’s for overall ticket prices.

Bo Tang - Barclays

Okay. So I guess just one question I have is just then do you see kind of the rate of the base ticket prices kind of slowing going forward? I mean I do understand that you facing taking some pretty tough comps, but just for the full year, do you see that rate of growth kind of slowing down a little bit?

David Ownby

No. It’s not that. Again, it’s going to fluctuate a lot of times based on the product quarter-to-quarter, Bo, but over the long-term, we think we can sustain that historical ticket price, the increase that we’ve experienced, which is in that 2% to 3% range.

Bo Tang - Barclays

Got it. Great. And also on Open Road, The Grey has grossed I think about $45 million now at the box office and it’s probably too soon to get a clear picture of how much in the downstream revenues this film could generate. But just given how the movie’s been tracking so far, are you able to give us a rough sense of the ROI for the movie?

David Ownby

No. I mean we really don’t want to get into too much individual film economics for Open Road other than just to say that we do expect that film to generate a profit through the downstream revenues.

Bo Tang - Barclays

Okay. Great. That was all I had. Thank you very much.

David Ownby

Thanks, Bo.

Operator

Thank you. Our next question is from the line of Marla Backer with Hudson Square. Please go ahead.

Marla Backer - Hudson Square

I had two questions. One is just a little bit more clarity on Open Road with the new film distribution agreement. So does that in any way take some of the slots that Open Road was originally planning for? And I think that number was working up towards 8 to 10 per annum?

Amy Miles

Yes, I think the best way to think about that, Marla, is remember that as 2012 is really the first full operating year for Open Road, what that did is help Open Road get to that 8 to 10 probably on a faster timeline than we may have expected. So going forward, I think that we can do complementary deals, but here, what it did is help jumpstart Open Road from a couple of films to get to that 8 to 10 probably faster than we would have expected.

Marla Backer - Hudson Square

Thanks. And then one other question, which is a follow-up to some of the M&A conversation we’ve had so far on this call. Given that there was a disappointing performance from the fourth quarter box office, is your sense, just based on the feelers you have out there in the market, is your sense that it sort of brought bid and ask spreads a little bit more in line in terms of what smaller circuits are looking for?

David Ownby

It’s hard to say, Marla, that one quarter would really have that impact. I mean particularly when you turn right around and you have a box office like we’ve had for the first six and a half weeks of this quarter.

Marla Backer - Hudson Square

Right.

David Ownby

So that tends to be a discussion that happens on a longer period of time than just a quarter or even six and a half weeks of the first quarter.

Operator

Thank you. Our next question is from the line of Eric Wold with B. Riley. Please go ahead.

Eric Wold - B. Riley

A couple kind of follow-up questions on previous questions asked. On the operating cost side, I know you’re still early in the spectrum on seeing any savings from going digital and you’re not putting a number there, but as you look at excluding that on the normal operating costs savings, where do you think you are kind of on that spectrum? Are you towards the end so any upside is going to squeeze out there in 2012?

David Ownby

Yes. I mean, I think Eric what our guys in the field have done a great job in 2011 of managing those costs and taking the information that we’ve been able to give them and managing accordingly. Obviously, some of that declined as you’ve seen other operating expenses in 2011 also was related to the fact that we had lower attendance. So I would say that at this point, I fully expect our guys in the field to keep doing the great job that they’ve been doing, but the opportunity for significant further reductions is probably behind us.

Eric Wold - B. Riley

Fair enough. And then just one follow-up question on Open Road. Can you give us a sense on The Grey, kind of where P&A for that so if you want to give a specific number; I know you kind of talked about a $20 million to $25 million range on average. Within that range? Above that range? And then with two movies now in the past, anything you’re seeing that would make you believe that the $20 million to $25 million is not enough, too much, or still the right number going forward?

David Ownby

Yes. I mean, I think there have been some published reports of The Grey being kind of in that range you talked about, and certainly that’s right in the area code. And going forward, I think it’s going to be film-by-film. Some films will require a healthy P&A spend; other films may not, and we’ll just make that decision on a film-by-film basis.

Operator

Thanks. Your next question is from the line of Matthew Harrigan with Wunderlich Securities. Please go ahead.

Matthew Harrigan - Wunderlich Securities

Thank you. The serial correlation in the box office results never fails to amaze. But apart from being just dependent on the quality of the studio product, I guess the other levers you have are loyalty programs, and I guess to some extent, the more sophisticated local marketing and not just talking about Groupon. Obviously that’s trite. Can you talk a little bit about what you’re doing in that regard on the local basis because it seems like it could be kind of interesting?

Amy Miles

Yes. You’ve hit on two areas that we focus on, Matthew. The first would be the loyalty program. Today, we operate the industry’s largest loyalty program. So we are spending a lot of time figuring out how do we best market to our frequent customers. And the most recent information I have is out of those 8 million active members, they spend on average for the past couple of years at Regal somewhere around $700 million. Okay? So that’s Box and Concession. So obviously, we’re spending a lot of time mining that data and figuring out the best ways to communicate with that customer group to drive attendance.

And then from a local marketing perspective, we do have local marketing promo coordinators across the United States that are responsible for more local promotions of films. So they spend a lot of time working with the theater managers in their respective markets to make sure we’re capitalizing on all local opportunities that we can. But it is a big focus for us, both the loyalty program and the local marketing effort.

Operator

Thank you. Our next question is from the line of Jim Goss with Barrington Research. Please go ahead.

Jim Goss - Barrington Research

Thanks. A couple of areas, one related to Open Road. Do you have international distribution for these films? Or do you have a certain deal struck with any of the studios? Or are you doing it separately?

Amy Miles

Yes. Jim, I’m sorry. For both Killer Elite and Open Road, we bought the domestic rights. The Grey, we bought the domestic rights only.

Jim Goss - Barrington Research

Okay. With regard to the level of revenues so far in the first quarter, I know it’s a big bounce back, but are you looking at this as the current pace is more of a normalized pace? Or do you think it’s above or below where you think things should normally be? At some point, I think we need to stabilize at some rough area.

David Ownby

Yes, I mean it’s hard to define normal I guess in a content-driven business, Jim. So certainly we’re pleased with the box office results through the first six and a half weeks for the year, and as Amy mentioned in her prepared remarks, we’re optimistic about the remainder of the first quarter and the remainder of the year.

Jim Goss - Barrington Research

Okay. And with the RealD impairment, was that strictly related to the price shift or something more?

David Ownby

No, that’s strictly an accounting function, Jim, and it’s strictly a result of their historical trading pattern of their stock price.

Jim Goss - Barrington Research

Okay. And 2D, I think you mentioned, I didn’t quite catch one of the changes, $8.19 was the price. How did that compare with a year ago?

David Ownby

That’s the 2D ticket price, $8.19 versus $8.17 last year.

Jim Goss - Barrington Research

Okay. And does the IMAX number include RPX also?

David Ownby

No, we haven’t historically disclosed the RPX number. That’s not really a big enough number yet to matter.

Operator

Thank you. Our next question is from the line of Joe Hovorka with Raymond James. Please go ahead.

Joseph Hovorka - Raymond James

Thanks. Just a couple quick questions. Did you give the profitability of Open Road in the quarter?

David Ownby

Are you talking about in the fourth quarter, Joe?

Joseph Hovorka - Raymond James

Yes, for fourth quarter?

David Ownby

I think if you look on our Other Net line on the financial statements, you’ll see there that we have income of $1.6 million. That’s composed primarily of two things. We had a $4 million gain on our DCIP equity investment. We had a $2.6 million loss on our Open Road investment for the quarter.

Joseph Hovorka - Raymond James

Okay. And what kind of screen count do you expect to end 2012 with?

David Ownby

I think back in the prepared remarks, we said that we would expect to open 5 to 7 theaters and 70 to 100 screens this year.

Joseph Hovorka - Raymond James

Okay.

David Ownby

And we would close 8 to 10 theaters with 60 to 80 screens. And just using the midpoint of those ranges that would get you to 524 theaters and 6,629 screens.

Joseph Hovorka - Raymond James

Great. I’m sorry. I missed that.

David Ownby

That’s okay.

Operator

Thank you. Our next question is from the line of Tuna Amobi with Standard & Poor’s. Please go ahead.

Tuna Amobi - Standard & Poor's

So, my first question is on the premium screen contributions. I guess since 2012 is going to be your first full year of build outs on the screens. Could you perhaps give us some color on what you expect the percentage to kind of max out? I know it kind of fluctuates and recently high-teens to low-20s. Do you expect at some point that you might actually get to mid-20s to high-20s? And what’s your expectation there as you’ve talked about your asset base, the mix shift and all that? Does that factor into your M&A strategy? That would be helpful.

David Ownby

Sure. You know just like trying to predict the box office, trying to predict that percentage is very difficult as well because ultimately it’s going to depend on each individual film that is available in those particular formats. I think from an asset base perspective, we feel like the mix of screens that we have today will adequately service the demand that’s out there for 3D product. As we said, we’ll continue to build out our IMAX and our RPX platforms, but those are at a much smaller number of screens than the RealD rollout was. So I think going forward we’re certainly hopeful about the prospects for the premium formats and we believe that they have performed in a very consistent manner over the last six or seven quarters. Whether they can go to the next level, again, will be dependent on the success of those individual films that are in those formats.

Tuna Amobi - Standard & Poor's

Okay. Fair enough. Switching gears to concession per-cap, how confident are you that this year perhaps you’ll kind of see kind of the increase that we’ve seen lately. I know you’ve still got the expanded menus rollout in a few additional locations, so any color on that would be helpful.

David Ownby

Sure, Tuna. Historically, we’ve kind of been able to raise our concession per-caps about 2% per year. Now if you drill down to a quarterly number, those numbers can fluctuate a little bit more based on the makeup of the film slate. But I think over time, we’re certainly comfortable being able to grow that concession per-cap kind of in that 2% area code going forward.

Tuna Amobi - Standard & Poor's

Okay. That’s helpful. And lastly, you mentioned distribution fees for Open Road. Can you perhaps give us some color on those for modeling purposes?

David Ownby

Yes, we really don’t want to get into too many economics for specific Open Road releases. On a large scale, in the big picture, if you want to think about they basically do two types of deals. They do acquisitions. That’s where they invest capital in a film and hope to make a return. And on the other end of the spectrum, they do service deals, and that’s where they simply have no capital at risk, they simply earn a distribution fee. Both releases that Open Road has done so far have been acquisitions. The next two films that are scheduled for release for Open Road are both service deals.

Tuna Amobi - Standard & Poor's

And my question was actually related to the service deals. Is 8% reasonable? Or is that a little high on terms of the fee structure?

David Ownby

Yes. It’s different for every film and we don’t really want to get into the economics for specific films. Okay. Thanks, everyone. Just one administrative note before we end the call. Effective tomorrow, I guess, or today, Kevin Mead will be taking on the Vice President of Investor Relations role here at Regal. Kevin has worked here with the company in other capacities for the last six years and he’s anxious to get started in his new role and we look forward to you meeting him and working with him going forward. Thank you so much for dialing into our fourth quarter conference call and we look forward to speaking with you again next quarter. Thanks.

Amy Miles

Thank you.

Operator

Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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