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Executives

Don De Laria - VP Of IR

Mike Campbell - Chairman & CEO

Amy Miles - EVP, CFO & Treasurer

Analysts

Eric Handler - Lehman Brothers

Gordon Hodge - Thomas Weisel Partners

Hunter DuBose - Morgan Stanley

Michael Savner - Banc of America Securities

Scott Barry - Credit Suisse Group

TRANSCRIPT SPONSOR
Wall Street Breakfast

Regal Entertainment Group (RGC) Q2 2007 Earnings Call July 26, 2007 9:30 AM ET

Operator

Good morning. My name is Ryan, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regal Entertainment Group second quarter 2007 earnings release conference call with our hosts, Mike Campbell, Chief Executive Officer of Regal Entertainment Group, and Amy Miles, Chief Financial Officer of Regal Entertainment Group.

All lines have been placed on mute to prevent any background noise. After management's remarks, there will be a question-and-answer period. (Operator Instructions)

I would now like to turn the call over to Mr. Don De Laria, Vice President of Investor Relations. Please go ahead, sir.

Don De Laria

Hi and good morning.

Before I begin today, I'd 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 26, 2007. All forward-looking statements are expressly qualified in their entirety by such factors.

I'll now turn the call over to Mike Campbell.

Mike Campbell

Thank you, Don. Welcome and thank you for dialing into our second quarter conference call.

Today, I will provide an overview of the industry's and Regal's second quarter results, an update on the company's digital conversion strategy, and a review of current trends in the exhibition industry, including summer box office trends and our expectations for the second half of the year. Following my remarks, Amy Miles will provide a summary review of our financial results. And, as always, we will conclude the call with a question-and-answer session.

Now, turning to second quarter industry results. Based on the various industry sources for the time period that corresponds to Regal's second fiscal quarter, the industry's second quarter box office revenue exceeded last year's total by just over 1%.

The April box office was down approximately 1.2% compared to the same period last year. Blades of Glory and Meet the Robinsons led the monthly box office but fell just short of the difficult comps with last year's Ice Age 2.

As expected, the industry box office rebounded in May, and the industry benefited from record-breaking box office results. The May box office, which exceeded last year by approximately 16.5%, was led by the solid performances of Spider-Man 3, Shrek the Third, and Pirates of the Caribbean: At World's End.

The combined total gross of these three very popular franchise films matched our expectation of approximately $1 billion in total domestic box office revenues.

Now, the June box office declined about 5.5%, primarily compared to the same period last year. The top five movies in fiscal June increased 5.2%, while the mid-tier films under-performed resulting in the overall decline in the monthly box office.

As noted in the discussion of the May box office results, the second quarter was dominated by blockbusters, as the top three films represented 40% of the quarterly box office revenue as compared to 28% last year, with the majority of the gain coming at the expense of the mid-tier films.

As previously stated, industry sources report an increase in aggregate box office revenues of 1.2%, which would imply the industry box office revenues were flat with last year on a per screen basis. On a per screen basis, Regal again outperformed the industry average, as our box office per screen growth was approximately 2% for the quarter.

Now, turning briefly to Regal's second quarter results. We're pleased to report the following quarterly highlights. Growth in admissions revenue of 1.2% coupled with growth in concession revenue of 6.6%. Adjusted EBITDA for the quarter of $130.4 million.

The quarterly results benefited from the accretive monetization of our Fandango investment. And during the quarter, we returned value to our shareholders with dividend payments totaling $2.30 per share, bringing our total dividends to approximately $17 per share, since our IPO in 2002.

Now, turning briefly to an update on digital cinema. Our digital conversion strategy remains on schedule. Our goal at the beginning of the fiscal year was to begin digital installations in our new theaters opening during the fourth quarter of this year, and we are on track to meet that timeline.

We would also expect to begin converting our existing locations to digital during the first half of 2008. And again, we would expect that a complete conversion of our circuit will take approximately three to four years.

DCIP is continuing to work with the studios to negotiate and finalize the virtual print fee contracts. And negotiations of the financing plans are also in process. We remain optimistic regarding the benefits of digital cinema, primarily as it relates to future growth potential associated with 3D film product and other 3D content.

As indicated in our first quarter conference call, we have increased our REAL D 3D units from an initial investment in 17 units to our current investment in 109 units. Over the next couple of years, we would expect to increase the number of our 3D capable screens, as we execute our digital cinema conversion plan.

Based on forecasted film slates from the major Hollywood studios, we believe that 3D technology may be suitable for as many as three to four screens in each of our high-volume 16 to 20-screen megaplexes and possibly totaling 1,000 to 1,500 screens circuit-wide for Regal at maximum deployment.

Turning briefly to our outlook for the balance of the third quarter and the summer film slate. During the first three and a half weeks of the third quarter 2007, the industry box office has increased approximately 11% versus the prior comparable period last year. We are obviously encouraged by the early third quarter box office results.

The month of June opened strong -- excuse me -- the month of July opened strong with the July 3 release of Transformers, followed by Harry Potter and the Order of the Phoenix on July 11.

Tomorrow, Fox opens The Simpsons Movie. And on August 3, Universal opens a third installment in the highly successful Bourne series, The Bourne Ultimatum. And then, finally, on August 10, New Line opens another successful franchise film, Rush Hour 3.

Looking forward to the fall and holiday film slate. As a reminder, the fiscal fourth quarter represents Regal's easiest 2007 quarterly box office comp, as last year's fourth quarter box office was down just under 1% from the same quarter in the prior year.

With respect to specific film titles, November releases include DreamWorks' The Bee Movie, with Jerry Seinfeld; American Gangster, starring Denzel Washington and Russell Crowe; Fred Clause, with Vince Vaughn; and the next 3D release, Beowulf. The November slate also includes Mr. Magorium's Wonder Emporium and Disney's Enchanted.

As we look to December, the film release schedule includes The Golden Compass; I Am Legend, starring Will Smith; National Treasure: The Book of Secrets; and Charlie Wilson's War, with Tom Hanks.

So in summary, we are pleased with the fiscal year-to-date box office environment and look forward to continued box office success during the balance of the year. I would like to turn the presentation over to Amy Miles, our CFO, to discuss the Company's financial performance.

Amy Miles

Good morning. Today, I would like to provide additional detail on Regal's fiscal second-quarter results and provide an update with respect to our balance sheet and CapEx.

Regal Entertainment Group reported total revenues of $683.4 million consisting of $457.9 million from box office revenues, $197.4 million from concessions, and $28.1 million of other operating revenues. The reported 1.2% increase in box office revenue consists of a 6.9% increase in our average ticket prices, somewhat offset by declining attendance for the quarter.

The quarterly results benefited from a 6.6% increase in concession revenues, resulting from a 12.7% growth in our concessions per cap. Approximately, half of the increase in our concession per caps is due to an increase in pricing for the quarter, with the balance of the increase relating to the concession-friendly film slate as well as a favorable mix of concession products for the quarter.

The growth in our admissions and concession revenues was offset by a decline in our other operating revenues due to the modified Exhibitor Services Agreement with National CineMedia.

Looking briefly at the expense line items for the quarter. Film and advertising expense as a percent of box office for the current quarter represented 55.1% of admissions revenue. Film rental and advertising expense increased by a 100 basis points over the prior comparable quarter, and that's primarily as a result of the previously communicated blockbuster-laden mix of film product during the quarter.

The top five pictures represented approximately 50% of our box office revenues versus 41% in the second quarter of 2006. We are also pleased to report that the concession margins, again, before factoring in our vendor marketing programs, increased 150 basis points over the comparable quarter, resulting in a margin of 85.9%.

Total rent expense increased $3.5 million, or 4.4%. And that's due to normal inflationary increases and our newer, more productive screens replacing older, less productive screens. Our other operating expenses increased approximately $7.6 million, or 4.5%, for the quarter, primarily as a result of increases in labor and other non-rent occupancy costs.

The increase in labor was the result of the previously communicated state minimum wage increases coupled with normal inflationary increases. And the non-rent occupancy costs increases, again, relate primarily to our new screens.

The second quarter produced adjusted EBITDA of $130.4 million versus $148.2 million for the same quarter last year and resulted in an adjusted EBITDA margin of 19.1%.

As a reminder, the $48.2 million of adjusted EBITDA in the prior quarter included a contribution of approximately $20 million from National CineMedia. The current quarter includes approximately $4.3 million from National CineMedia, and this $16 million reduction explains the majority of the quarter-over-quarter decline in our adjusted EBITDA.

Regal reported diluted earnings per share of $0.33 for the quarter, and that includes the benefit of our Fandango transaction. Excluding the onetime gain on the Fandango transaction, we reported adjusted diluted earnings per share of $0.22 for the quarter.

Looking briefly at our balance sheet and asset base. We ended the quarter with just under $407 million in cash and a total debt balance of just under $2 billion. Our pro forma leverage remains conservative as compared to our peers, and that provides financial flexibility for Regal and supports our focus on free cash flow and returning value to shareholders.

With respect to Fandango, during the quarter, we received approximately $34 million of gross proceeds from the modification of our Fandango ticket agreement and the related sale of our investment. We will continue to utilize Fandango for online ticketing through a multiyear agreement with its new owners.

Looking briefly at our CapEx for the quarter, capital expenditures during the second quarter totaled $37.9 million. During the quarter, the Company recorded proceeds from asset sales of approximately $7.7 million. As such, the net CapEx was $30.2 million.

During the second fiscal quarter, we opened four theaters with 68 screens and closed four theaters with 40 screens, bringing our totals to 529 theaters and 6,368 screens.

Based on our development schedule for '07, we continue to expect full-year net CapEx to be in the range of $110 million to $125 million, and that is inclusive of $10 million to $15 million of asset sales.

For '07 -- for the fiscal year '07, we continue to expect to open eight to ten theaters with 125 to 145 screens and close approximately 20 to 25 theaters with 155 to 175 screens, resulting in an ending theater count of approximately 525 theaters and a screen count of 6,375.

As Mike previously stated, we are pleased with the year-to-date box office results, and we look forward to continued success for the balance of the fiscal year.

This concludes our remarks. And now, we would like to open the lines for any questions.

Question-and-Answer Section

Operator

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. (Operator Instructions) We'll take a moment to poll for questions.

Our first question comes from the line of Eric Handler with Lehman Brothers.

Eric Handler - Lehman Brothers

Thanks. Good morning. Amy, when you talked about half of your increase in concessions as a result of higher pricing, would you believe then that a per cap spending in excess of $3 per patron is sustainable, going forward?

And then, secondly, can you talk a little bit about your ticket pricing? It was the second consecutive quarter of 7% plus growth. Is this a function of your new theaters? Is it you're raising prices across the country? Is it regionalized? Just give some analysis on that, please.

Amy Miles

Yeah. I think there is a couple of things, and I'll start with the concession per cap. With respect to the third quarter and how the pricing increases would move forward to the third quarter, I think, it's sustainable for that period. A portion of the price increase that's benefited -- benefiting the company in the second quarter, we started the program in fourth quarter of 2006.

So from that perspective, that will be a little bit of a harder call as compared to the third quarter, where we start to cycle, again, some of the increases. And then, how it -- you know, how the per cap may move in the third or fourth quarter above our pricing is going to be, again, dependent upon the film product for that quarter.

With respect to our ticket pricing, I think, there has been -- we've had some beneficial film product in both the first quarter in the second quarter. Remember that the third -- the first quarter, the biggest picture was 300. So we had the benefit from an R-rated ticket price then.

And if you look at the second quarter of this year, we've had a similar benefit, where last quarter, 8.4% of our revenues were generated by G films, and only 4.2% of our revenues were generated by G-rated films in this quarter. And one of those was Meet the Robinsons, and that obviously had a higher ticket price because of the 3D runs.

And also with the success of Knocked Up for the second quarter, the R-rated films were 22% of our business versus just under 14% last year. So we've had, probably, a consistent -- you know, I'll call it 4% to 5% ticket price increase, and above that for both Q1 and Q2 has been the benefit of film product.

Eric Handler - Lehman Brothers

Great. Thanks, Amy.

Operator

Our next question comes from the line of Gordon Hodge with Thomas Weisel Partners.

Gordon Hodge - Thomas Weisel Partners

Yes. Good morning. Just a couple questions.

Mike Campbell

Good morning, Gordon.

Gordon Hodge - Thomas Weisel Partners

One is -- just curious -- with Beowulf coming out in 3D later, I guess, in November, I'm just curious if you have a sense of where you'll be in terms of 3D screens at that point?

And then, second question is, as far as DCIP goes, what -- are they negotiating with each studio individually or is it more of a group negotiation where there will be one final agreement on the virtual print fees at some point in the near future? And then, is DCIP affecting your -- are their expenses running through your income statement that we should be looking at separately? Thanks.

Mike Campbell

Okay. Regarding Beowulf, we have currently 109 units. And we've made it clear in the past that once we begin our own deployment of digital conversions through DCIP, we could rapidly accelerate the rollout of 3D screens.

That being said, during that interim period, we have made it clear to REAL D that we would continue to accept additional screens as long as they can provide the projectors that we need free of charge to us to roll out prior to our overall rollout. So, I guess, the answer is we would expect to probably have a few more 3D screens for Beowulf, but I can't give you a definitive answer on how many.

Gordon Hodge - Thomas Weisel Partners

Okay.

Mike Campbell

Regarding DCIP, I mean, the intent is this would be one master contract with the various studios. And they all have to individually agree to it, but it's one contract. And obviously, the way the model is built is that as long as we have the majority of the studios, we move forward that sign up for this.

And there would be a provision in the contract to accept product from what we would call nonparticipating studios. But there would be an additional charge, if you're not part of this program going in. So once we get the master contract agreed to by the major studios, everybody is on the same plan.

Amy Miles

And, Gordon, with respect to your last question, there was an initial funding by all partners of DCIP to capitalize DCIP.

Gordon Hodge - Thomas Weisel Partners

Okay.

Amy Miles

So that shows up as a balance sheet investment. So there are no P&L expenses. That's not an entity we consolidate. So there is no P&L expenses today associated with DCIP.

Gordon Hodge - Thomas Weisel Partners

And was it significant on the balance sheet in terms of the funding?

Amy Miles

No, it was not.

Gordon Hodge - Thomas Weisel Partners

Okay. Terrific. Thanks.

Amy Miles

Sure.

Operator

Our next question comes from the line of Hunter DuBose with Morgan Stanley.

Hunter DuBose - Morgan Stanley

Thanks. Good morning, guys. A few quick questions for you. First of all, could I ask you to quickly clarify what the tax treatment is for earnings recognized from NCM? And second of all, could you give us more clarity around how we should be thinking about the long-run cost to deploy the 3D systems -- the sort of 1,000 to 1,500 systems that you were talking about?

And as part of that, could you also give us your views on the relative merits of the REAL D system and the forthcoming Dolby 3D system in terms of the trade-off of disposable versus reusable glasses and the need for a silver screen or not? Thanks.

Amy Miles

I'll take the first question. With respect to the tax treatment, you can think about all of the receipts that we receive from National CineMedia, be it the theater access fee, the cash distribution, the tax receivable payment, all of those are taxable to us.

Mike Campbell

Yeah. Regarding the cost of 3D, going forward, I think, we've indicated before that these initial units we were investing about $25,000 in some of the early 3D servers. But we believe that going forward, certainly, under the scenario of a mass rollout that that deal would change significantly.

And I would tell you that I believe that we could have flexibility to do deals that range from zero investment on our part in favor of some small revenue-sharing arrangement with the provider up to us investing a 100% of the dollars for that technology, although I would expect the cost to come down over what we've experienced historically.

As for REAL D versus Dolby, I mean, you know, I think, both technologies work. But we have been favorably inclined and favorably impressed with REAL D. It does require a silver screen, but our opinion is that silver screens are perfectly fine for 2D and 3D presentations.

And we really like the idea of having disposable glasses, because we believe that long-term, anytime you have something that's not disposable, you have potentially more cost, as it involves more labor to distribute, collect and sanitize those devices as well as shrinkage on those devices is much more expensive rather than using a disposable item.

So, right now, we're firmly in the REAL D camp. If somebody can show us something that's comparable, we'd certainly take a look at that.

Don De Laria

I think we can go to the next question.

Operator

Our next question comes from the line of Michael Savner with Banc of America Securities.

Michael Savner - Banc of America Securities

Good morning. Thanks. Two questions. First, Mike and Amy, can you just update us on your -- on the M&A environment? What you're looking at or the timing by which you'd like to capitalize on an opportunity?

And if not, obviously, you have been efficient re-deployers of cash in the past, so is there some kind of timeframe we should think about where you'd put -- go back to your, kind of, more traditional leverage ratios if you can find a deal that's good for you?

Second question. Can you just give us a little bit more granularity, Mike, in terms of your expectations for 3D films coming to market next year? How many you're aware of and over what time period summer releases or holiday releases, and then where you'll be -- at least your preliminary expectation of where you'll be during those points in the year for 3D equipment? Thanks.

Mike Campbell

Yeah. On M&A activity, obviously, we're bound by confidentiality agreements in many cases when we're looking at an M&A opportunity. But I mean, I can say that as we have said earlier that there is more activity out there this year than there has been in the last year, year and a half. And I think you can safely assume that anything that is out there, we have an opportunity to look at. But there is nothing specific that we can give you today.

3D films -- I think what you're going to see in 2008, you would probably see four, five, six films, more like what you've seen in this past year and the current year. But I believe when you get to '09 and going forward, what we expect to see would be 10 or 12 films per year in the 3D format.

Some of those films have been announced. Some of those have not. But we've heard from various sources that there will be more films than have actually been announced. And here, again, I think, the real key is just how quickly the industry can deploy the 3D units. And as we said earlier, our overall rollout somewhat dictates how quickly we can roll out 3D screens.

But we believe that a good number for us to shoot for over the term of our digital deployment would be 1,000 to 1,500 screens within Regal, which we believe would give us representation to the tune of our market share today, which is about 20% of the box office.

Michael Savner - Banc of America Securities

Terrific. Thanks very much.

Operator

(Operator Instructions)

Our next question comes from the line of Hunter DuBose with Morgan Stanley.

Hunter DuBose - Morgan Stanley

Hi, guys. Just a follow-up question. Regarding the box office mix for the second quarter, indicating that there was a drop off in demand for the second-tier non-tent-pole films, what factors do you think contributed to that, and how should we be thinking about that trend going forward?

Mike Campbell

I think it's more a reflection of blockbuster films being out there. I mean you had three monsters out there, with Pirates and with Shrek and with Spider-Man. And I think a part of it was some fear, perhaps, on the studios' part of releasing what I would call the better second-tier product in the face of those blockbusters. And I think that really impacted you late May and probably into the middle of June.

But I think once people believe the schedules were cleared of the blockbuster, the ongoing impact of those blockbusters -- you saw the market open back up. And indeed, in late June and into July, you saw a market where you had blockbusters like Transformers performing well alongside more modest films like Die Hard and Ratatouille.

So I think it was somewhat of an anomaly based on what you saw in May. I don't see, unless we have periods again where you've got three huge blockbusters released over a three-week period, that you would see that again.

Hunter DuBose - Morgan Stanley

Okay. Thanks.

Operator

Our next question comes from the line of Scott Barry with Credit Suisse Group.

Scott Barry - Credit Suisse Group

Good morning. A couple questions. Amy, when we look at 2007, should we still look for a modest working capital pickup like we've seen historically?

Amy Miles

Scott, with the exception of -- if we segregate on National CineMedia -- and when you're looking at this quarter and you see a big swing in working capital. Last year, working capital contributed about $8.8 million -- and this is for the quarter, second quarter only --and this year, you see that working capital is a use of cash of about $137 million.

So what that roughly $145 million swing consists of is there is $131 million of that relates to tax payments being accelerated; $92 million of that is with respect to the National CineMedia taxes; and then the balance, which is about $39 million, is just the company's normal tax payments, which -- there is some slight impact of Fandango.

And then you also see, this quarter, a greater use of cash in the film payable area. Because of most of the blockbusters happening in May, we've paid a lot of those film costs by the time you get to the end of June.

So that's the dynamic of this quarter. But when you get to the end of the year and you exclude the benefit that National CineMedia will provide, yes, it should be -- the working capital should be more like a normal course working capital, which is a slight pickup.

Scott Barry - Credit Suisse

Okay. Great. And I may have missed this. But there hasn't been any resolution on the tax-sharing contribution from NCMI yet. Has there?

Amy Miles

There is resolution. But with respect to this, it's contractual. So I just want to be clear there. But they do have to go through calculations on an annual basis and, you know, to determine whether or not we could book that as a pickup ahead of the cash receipt of that. And to date, we don't have that information.

Scott Barry - Credit Suisse

So you haven't yet created a receivable, sort of?

Amy Miles

You got it.

Scott Barry - Credit Suisse

Okay. Great. And then --

Amy Miles

And there is nothing in our P&L with respect to the TRA.

Scott Barry - Credit Suisse

Okay. Great. And then just one last question. Maybe you could discuss, since you have a -- you're picking up a 53rd week next year, what that precedent looked like back in -- what the impact was back in 2003? That would be great. Thanks.

Amy Miles

Well, we would take it again for sure. But what it meant for us in 2003 -- because that's the biggest -- one of the biggest movie-going weeks -- you know, you have your July 4 week and your Christmas week as your two biggest weeks of the year, typically, that's represented about -- call it, 2 to 3% of our annual attendance occurs in that week. And the cash flow benefit in 2003 was $40 million.

Scott Barry - Credit Suisse

Okay. Great. Thanks very much.

Operator

And seeing that there are no further questions in the queue, I would like to turn the call back to management for any concluding remarks.

Mike Campbell

Well, we appreciate you calling in for the conference call today, and we'll join you again next quarter. Thank you very much.

Operator

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation.

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