Regal Entertainment Group (RGC) Amy E. Miles on Q2 2016 Results - Earnings Call Transcript

| About: Regal Entertainment (RGC)

Regal Entertainment Group (NYSE:RGC)

Q2 2016 Earnings Call

July 26, 2016 4:30 pm ET

Executives

Amy E. Miles - Chairman & Chief Executive Officer

David H. Ownby - Executive Vice President, Chief Financial Officer & Treasurer

Analysts

Eric O. Handler - MKM Partners LLC

Barton Crockett - FBR Capital Markets & Co.

Tony Wible - Drexel Hamilton LLC

Benjamin Mogil - Stifel Nicolaus

Alexia S. Quadrani - JPMorgan Securities LLC

Matthew J. Harrigan - Wunderlich Securities, Inc.

James Charles Goss - Barrington Research Associates, Inc.

Question-and-Answer Session

Unknown Speaker

[Abrupt Start]

Amy E. Miles - Chairman & Chief Executive Officer

I think we feel very optimistic with respect to the long term prospects in the industry and also have a long-term history of being a consolidator of the industry.

Unknown Speaker

Okay. And for David, if you don't make any acquisitions by the end of the year, are you able to help us think about the special dividend question. What the – how likely that is for – as an outcome or the different factors you consider when making a decision?

David H. Ownby - Executive Vice President, Chief Financial Officer & Treasurer

Yeah, I think, Amy tried to address that in her prepared remarks. I think, we were pretty clear there that our approach to capital allocation hasn't changed. Over time, we've been able to successfully both reinvest in the business and provide a meaningful cash return to our shareholders, and we believe that over the long term, we'll continue to be able to do that.

Obviously, she also talked about the investment opportunities that we have in front of us. So certainly, to the extent we can continue to achieve those high returns, we want to make sure those high returns get a priority because the good thing about those is that they just generate more cash for us to allocate, and that's something that, over time, we believe we excel at and something that we believe has been a real differentiator for us.

Unknown Speaker

Okay. Thank you both.

Amy E. Miles - Chairman & Chief Executive Officer

Thank you.

David H. Ownby - Executive Vice President, Chief Financial Officer & Treasurer

Thank you.

Operator

Thank you. Our next question comes from Eric Handler with MKM Partners. Please proceed.

Eric O. Handler - MKM Partners LLC

Yes. Thanks for taking my question. David, I wondered if you could dig in a little bit on the average ticket price increase. I'm actually surprised, given that your IMAX and RPX business was down so much on a per screen basis and those are your highest priced tickets that you still got 2.4% or 2.6% average ticket price growth. Wonder if you could sort of maybe dissect that a little bit, how much growth did you get from the reseats? Was there some tax-on-top issues or just a base price increase?

David H. Ownby - Executive Vice President, Chief Financial Officer & Treasurer

Thanks, Eric. There are a lot of moving pieces to it this quarter. You're correct about that. At the recliner locations, our average ticket price was up almost 8%, and if you kind of break that down and weight that properly to the rest of the circuit, that contributed about $0.07 of our increase for the quarter. Obviously, going the other direction, you had the impact of the decline in the premium business. And I'll stop and say there, it was still a really good quarter from a premium perspective. Over 20% of our box office revenue came from our large format and 3D screens, and that's a good number historically. It just pales in comparison to last year's number which was closer to 24% given the success of Avengers 2 and Jurassic World.

So, we had some headwind there a little bit. I think that number of headwind more or less offset the benefit that we got from the recliners. So, really what's left there then is just our, kind of our normal inflationary type price increases. And those would be the ones that have happened really over the last 12 months, not the ones that just happened this year. So, since we reported last year, we've taken pricing in different markets where we felt like that was appropriate and really that's the biggest driver of the 2.6% increase that you see here.

Eric O. Handler - MKM Partners LLC

Okay. And then as a follow-up, I missed pretty much most all of Amy's talking points just because of some technical issues. Where do you stand now with as far as what's been reseated and what's coming the rest of the year?

David H. Ownby - Executive Vice President, Chief Financial Officer & Treasurer

Eric, we've got a little over 1,000 screens today. We'll get to between 1,400 and 1,500 by the end of this year, and then to roughly 30% of the circuit by the end of 2017.

Eric O. Handler - MKM Partners LLC

Perfect. Thank you.

David H. Ownby - Executive Vice President, Chief Financial Officer & Treasurer

Thank you.

Operator

Our next question comes Barton Crockett with FBR. Please proceed.

Barton Crockett - FBR Capital Markets & Co.

Okay. Great. I similarly had some technical difficulties and missed much of the call here. But one of the numbers I think you cited was the decline in the premium formats and what happened with the balance of your box office. I was wondering if you could repeat those numbers. And also in times past you've had an issue where you've taken some screens offline, I think, to do reseats and other work, and maybe that affected the per screen comp. Was that a factor here as well?

David H. Ownby - Executive Vice President, Chief Financial Officer & Treasurer

Yeah, Barton, sure. Let me just go back and kind of recap what we said, and then we can expand on that wherever you'd like to. Our admissions revenue for the quarter was down by 11% in the aggregate. You heard Eric ask about the ticket price increase. The ticket price was up 2.6%, but that obviously couldn't really offset the industry attendance decline in the face of last year's record-setting film slate.

On a per screen basis, our box office fell by 10.9%, and that was, as you noted, primarily due to the weakness of our large format IMAX and RPX screens. Those screens were down about 29%, again really just by comparison to last year's performance of Avengers 2 and Jurassic World. If you exclude those large, 180 large format screens for us, the remainder of the circuit was down only about 9.5%. And when we look at the relevant industry benchmark – and obviously we're going to do this on a per screen basis – but it looked to us like the industry was down 10.3%. So we, from that perspective, we feel like we, again, excluding those large format screens, we were pretty happy that the recliner screens helped us outperform that industry benchmark.

Barton Crockett - FBR Capital Markets & Co.

Okay. But were there screens that were offline that created some downward pressure on your admissions revenue while you were receiving them?

David H. Ownby - Executive Vice President, Chief Financial Officer & Treasurer

Yeah. We talked about that maybe a year ago, Barton, as we were ramping up the recliner initiative, and that number fluctuates a little bit quarter to quarter. So yes, we had some screens offline that we were converting this year. We had the same thing last year. I don't have those numbers in front of me. The theatres that we're converting this year on average are a little bit bigger. So, my gut is that we probably had a few more screens down this quarter versus last quarter. But again, I don't have those numbers right here in front of me.

Barton Crockett - FBR Capital Markets & Co.

Okay. And then I think you called out Atom Tickets. What can you tell us about what you're seeing there? I mean, it seems potentially interesting, potentially impactful for ticket sales. What is the uplift you're starting to see there?

Amy E. Miles - Chairman & Chief Executive Officer

Yeah, I'll take that one, Barton. I think at this point in time, it's just early to indicate what that would be. We had a few test markets prior to the larger rollout that you're seeing today. And just to put that into perspective, by the end of September or beginning of September, 100% of the circuit will be Atom's ticket capable, okay. So that gives you some perspective of where we are in the rollout.

And in the initial markets where we tested, I don't have the exact numbers, but the lift in attendance was promising there. We agree with that. And as we continue to have additional data from the full rollout, we will provide incremental information. And one thing, David mentioned in his prepared remarks that as we're continuing to improve the customer experience with ticketing, and Atom is one way we're doing that, you are seeing that, a significant uptick in advance ticket sales.

Barton Crockett - FBR Capital Markets & Co.

Okay. And just one final thing, you guys in the past have given the breakdown of IMAX 3D and 2D ticket prices. Can we get that again this quarter?

David H. Ownby - Executive Vice President, Chief Financial Officer & Treasurer

Of course you can. Our IMAX ticket price for the quarter was $16.36. That's up about 1% from last year. The 3D price was $12.88, which was up about 2.5% from last year; and the 2D price was $9.21, that's up almost 4% from last year.

Barton Crockett - FBR Capital Markets & Co.

Okay. Great. Thank you.

Amy E. Miles - Chairman & Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Tony Wible with Drexel Hamilton. Please proceed.

Tony Wible - Drexel Hamilton LLC

Thanks. I wanted to ask about a couple of things. The first is the Atom Tickets pre-sale of concession. Just curious what the economics are on that. How much is going to Atom or the technology vendors? And is that something that's like a tax-on-top that the consumer would see or is it kind of bundled into the price? And then secondly on the film rents, I understand mix is obviously a big part, but could you just verify, are the rents changing on specific tentpoles at all? Have they fluctuated with the studio? This does definitely seem like it's a mix issue, but hopefully you could just clear that up.

Amy E. Miles - Chairman & Chief Executive Officer

Yeah, with respect to Atom Tickets, we have a deal that's very favorable to Regal Entertainment Group, but a deal that also works for Atom, but we would not disclose any, for competitive reasons, any of the specific nature of that deal. But we were very pleased with the partnership that we formed with Atom.

David H. Ownby - Executive Vice President, Chief Financial Officer & Treasurer

And, Tony, on the film rent, the fluctuations you've seen really for the past several quarters really have everything to do with the film slate and really nothing to do with new arrangements with studios. The film rent that we have, the agreements that produce the film rent this quarter were the same agreements we had in place for the last really two or three years. So nothing significant, no significant changes there that would really impact that film rent number.

Tony Wible - Drexel Hamilton LLC

Got it. Lastly, on the senior credit facility, when is that due now, and what's the rate term on that?

David H. Ownby - Executive Vice President, Chief Financial Officer & Treasurer

The facility expires in 2022. So we've got a long runway until we need to think about refinancing that.

Tony Wible - Drexel Hamilton LLC

And the terms, you said there was a little bit of savings.

David H. Ownby - Executive Vice President, Chief Financial Officer & Treasurer

Oh, I'm sorry. Yeah. We reduced the interest rate by 25 basis points, so we pay LIBOR plus 2.75%, and that's with a 1% LIBOR floor.

Tony Wible - Drexel Hamilton LLC

Thank you.

David H. Ownby - Executive Vice President, Chief Financial Officer & Treasurer

Oh, I'm sorry. LIBOR.

Amy E. Miles - Chairman & Chief Executive Officer

75.

David H. Ownby - Executive Vice President, Chief Financial Officer & Treasurer

LIBOR plus 75. I'm sorry. I think misspoke there, Tony.

Tony Wible - Drexel Hamilton LLC

Perfect. Thank you very much.

Operator

Our next question comes from Ben Mogil with Stifel. Please proceed.

Benjamin Mogil - Stifel Nicolaus

Hi. Good afternoon. Thanks for taking my question. So when you look at the sort of overall industry in terms of screen supply, looks like supply is kind of up I guess about 100 basis points. But sort of when I look at you and Cinemark domestically and AMC, you just kind of seem to be growing under that number. So maybe you can talk about who is adding screens and whether you think the sort of advent of the end-of-year clearances is kind of spurring some of this as well?

David H. Ownby - Executive Vice President, Chief Financial Officer & Treasurer

Ben, I think I'll speak for us. Obviously, I can't speak for Cinemark or others. But for us I think, well obviously we're going to put our investment dollars where we think the best return is. And right now, we believe that the best return is with the recliner projects. So obviously that's a spend that doesn't increase our screen count, but it does have the same impact of increasing our market share. So hopefully, you will see that in our numbers. I think you've seen it some already, but you'll see it even more going forward. And yeah, there are others out there adding screens, but it's hard for us to know exactly their motivation, but it certainly doesn't appear at this point that that has anything to do with any stances that someone is taking on clearances.

Amy E. Miles - Chairman & Chief Executive Officer

And I would say, Ben, too just to add on a little bit. The growth that we're seeing today is not at all outside that historic range.

Benjamin Mogil - Stifel Nicolaus

Got it. Are developers once again kind of, sorry, go on. I apologize. Sorry. Go on.

Amy E. Miles - Chairman & Chief Executive Officer

Yeah. No. That's okay. You saw some dip in the industry post the recession where you saw fewer theatres coming online. And so if you get past that time period, the building that we're seeing today and for the past couple of years I would say is very much in line with what the industry has seen over the past 10 to 15 years absent the recession.

Benjamin Mogil - Stifel Nicolaus

Got it. Would you say developers are like kind of helpful, but not irrational in terms of how much they're opening their wallets to sort of aid theatre building?

Amy E. Miles - Chairman & Chief Executive Officer

Yeah, I think, what – the only thing I will comment there is that you've seen some shift in with respect to the development community. Just as the customers are really enamored and like the new luxury buildings, so do developers. So, I think that's giving us some incremental opportunities to pursue luxury theatres, where maybe five or six years ago, we wouldn't have that potential. So, that's the only shift that I could really comment on with respect to the development community. Some of these smaller theatres where we can go in and do seven screens or eight screens, we have more opportunities today.

Benjamin Mogil - Stifel Nicolaus

That's great. Thanks, Amy. Thanks, David.

David H. Ownby - Executive Vice President, Chief Financial Officer & Treasurer

Thank you, Ben.

Operator

Thank you. Our next question comes from Alexia Quadrani with JPMorgan. Please proceed.

Alexia S. Quadrani - JPMorgan Securities LLC

Thank you. I know you re-affirmed your targets for the number of recliner screens in the next couple of years, I think, around 30% of your circuit. But I think only a few percent of your circuit is sort of the premium large format screen like IMAX or RPX. Could you help us understand, I guess, what would it look like longer term in terms of how much of a priority these POS are over the next couple years, like what sort of mix we should assume?

Amy E. Miles - Chairman & Chief Executive Officer

Well, first of all, we feel like we have a great complement of theatres today with respect to having approximately 90 IMAX theatres or auditoriums as well as approximately 90 RPX theatres. So, again, what David has mentioned earlier, as we're allocating capital we're going after opportunities where we feel like it's the highest return and where we're seeing that today is in the recliner area.

Now, that doesn't mean that in the future, we won't add additional premium auditoriums. We're just going to have to evaluate those specific opportunities against what we have in our recliner inventory, and whichever produces the highest return is what we will pursue. But we are very happy today with our 180 premium screens.

Alexia S. Quadrani - JPMorgan Securities LLC

And then just a follow-up, can you just touch on the Olympics in the past year? Has it had any affect at all on your box office performance or attendance, and do you think if it hasn't, could it be an issue this year, just given the overlap with the Brazil's time zone with the U.S.?

David H. Ownby - Executive Vice President, Chief Financial Officer & Treasurer

Alexia, it's so hard to quantify any impact in our business. It's difficult to know week to week exactly what's driving attendance, whether it's the quality of the content or whether it's some other external factors. I would say that in the 16 years that I've worked here, I would be hard-pressed to go back and think of an Olympics that had a meaningful impact on the box office.

Amy E. Miles - Chairman & Chief Executive Officer

And I think the good news, too, on the supply side is there's a lot of great content coming out during that time period.

Alexia S. Quadrani - JPMorgan Securities LLC

All right. Thank you very much.

Operator

Thank you. Our next question comes from Matthew Harrigan with Wunderlich. Please proceed.

Matthew J. Harrigan - Wunderlich Securities, Inc.

Thank you. I know I've asked you before about the effect of mall traffic down, and you said it wasn't really, it's pretty negligible. But with that continuing to recede, are you seeing any differences in performance from your theatres that are standalone versus in malls? And then I guess Cozy Bear and Fancy Bear from the Russian cyber service must have moved on from the DNC e-mails to blocking out the first part of your conference call.

I'm curious if Amy had any comments on product. Obviously, people know Suicide Squad is going to be great, but are there any sleepers? I know people are really high on, it's not exactly a sleeper, but I know people are really excited about Sing at CinemaCon even though that's later in the year. That looks like that could be a big movie that maybe isn't getting that much attention since it's not a sequel. But we've had some original animation do really well this year. Thanks.

Amy E. Miles - Chairman & Chief Executive Officer

Yes. Sure, Matthew. With respect to the first part of your question, no, we're not seeing any difference. We try to put our theatres in groups of mall versus non-mall theatres. We're not seeing any trends today that we could point to that would support some of the things that you're hearing from a retail perspective. Again, a theatre has always been – we have a lot of great theatres that are in unproductive malls, but the theatre itself is the draw. And those theatres are continuing to perform. Now, in the future, I think that you're going to see us in more of these lifestyle centers, so that's probably more of the change, is where we're finding future opportunities to build new theatres, but not so much in our existing theatre base are we seeing any kind of trend.

David H. Ownby - Executive Vice President, Chief Financial Officer & Treasurer

And then I think you asked just about the film slate, Matthew, and you know typically we don't give box office guidance. But I think when we look ahead to the slate for the remainder of this year, and Amy said in her prepared remarks even into 2017, some of the key dates and some of the key dates even past that, I think we remain optimistic about the film slate.

Matthew J. Harrigan - Wunderlich Securities, Inc.

Thanks, Amy. Thanks, David.

Amy E. Miles - Chairman & Chief Executive Officer

Thank you.

David H. Ownby - Executive Vice President, Chief Financial Officer & Treasurer

Thank you.

Operator

Thank you. Our next question comes from Jim Goss with Barrington Research. Please proceed.

James Charles Goss - Barrington Research Associates, Inc.

Thanks. As you do your ROI analysis or retrospective even on some of your additions, have you looked at or have you been able to measure capacity utilization in the reseated screens and potential spillover effect to other times and/or movies in your theatres?

David H. Ownby - Executive Vice President, Chief Financial Officer & Treasurer

Jim, I don't have any real statistics for you, but just anecdotally, yes, we certainly have seen at the recliner theatres where it's now oftentimes, it's oftentimes difficult to get a ticket on Friday or Saturday night because it's sold out. We have seen customers shift their behavior either to earlier in the day or even in some cases to weekdays. And we've had to adjust our operating model, and in some cases our operating hours accordingly to accommodate that business. So from our perspective, that's a real positive, and the more locations that have that dynamic, that gives us a lot of comfort as we talked about earlier in the call, that we continue to have the ability to raise ticket prices as well.

James Charles Goss - Barrington Research Associates, Inc.

Have you also seen a lot of opportunities for reseats in your smaller markets since you did make a couple of significant acquisitions in recent years with Hollywood and Great Escapes. Are a lot of those good locations for that as well?

David H. Ownby - Executive Vice President, Chief Financial Officer & Treasurer

Yeah. I think if you look down the list today, Jim, you'd see a really good cross section of our theatres. I don't know that anyone type of demographic or one size market is over or under represented. So, we just typically look for the location where we think we can drive the most attendees, where we can get a good deal from our landlord and thereby generate the best return.

James Charles Goss - Barrington Research Associates, Inc.

Okay. Lastly, subject came up with IMAX versus RPX. RPX you can receive I think IMAX you would not be able to. Has that made a difference in the attractiveness of your RPX location where you can do that in 4K and Dolby Atmos, all that sort of thing?

Amy E. Miles - Chairman & Chief Executive Officer

Yeah, ultimately anything that happens with respect to an IMAX auditorium, we're going to have to do that in partnership with IMAX. And those discussions are happening as we speak. Now to your point, we do have more flexibility with our own RPX and, yes, we're seeing very promising results where we have reseated RPXs.

James Charles Goss - Barrington Research Associates, Inc.

Okay. Thanks. That's it.

David H. Ownby - Executive Vice President, Chief Financial Officer & Treasurer

Thanks, Jim.

Operator

Thank you. I'd like to turn the floor back over to management for closing comments.

Amy E. Miles - Chairman & Chief Executive Officer

Thank you so much for joining us and again, we apologize for the early technical difficulties and we look forward to speaking to you at the end of our third quarter. Thank you.

Operator

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

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