Regal Entertainment Group Q3 2007 Earnings Call Transcript

Oct.26.07 | About: Regal Entertainment (RGC)

Regal Entertainment Group (NYSE:RGC)

Q3 2007 Earning Call

October 25, 2007 9:30 a.m. ET


Don De Laria - Vice PresidentInvestor Relations

Mike Campbell - Chairman of theBoard, Chief Executive Officer

Amy Miles - Chief Financial Officer,Executive Vice President, Treasurer


Eric Handler - Lehman Brothers

Gordon Hodge - Thomas WeiselPartners

Hunter DuBose - Morgan Stanley

Matthew Harrigan - Ferris Baker Watts

Michael Savner - Banc of AmericaSecurities


Greetings ladies and gentlemen, welcome to the Regal Entertainment third quarter2007 earnings release conference call. (Operator Instructions) It is now mypleasure to introduce your host, Mr. Don De Laria. Thank you Mr. De Laria, youmay now begin.

Don De Laria

Hi and good morning. Before I begin today, I would like to remind ourlisteners that this conference call contains forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933 as amended, andSection 21E of the Securities Exchange Act of 1934, as amended.

All statements other than statements of historical facts communicated duringthis conference call may constitute forward-looking statements. Theseforward-looking statements involve risks and uncertainties.

Important factors that can cause actual results to differ materially fromthe company's expectations are disclosed in the risk factors contained in the company'sannual report on Form 10-K dated February 26, 2007. All forward-lookingstatements are expressly qualified in their entirety by such factors.

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

Mike Campbell

Thank you, Don. And welcome and thank all of you for dialing into ourthird-quarter conference call. Today, I will provide an overview of theindustry's and Regal's third quarter results, an update on the company'sdigital conversion strategy, and a review of current trends in the exhibitionindustry, including summer box office trends and our expectations for theupcoming holiday season.

Following my remarks, Amy Miles will provide a summary review of ourfinancial results. And, as always, we will conclude the call with aquestion-and-answer session.

Now turning to third quarter industry results, based on the various industrysources for the time period that corresponds to Regal's third fiscal quarter,the industry's third quarter box office revenue exceeded last year's total byjust under15%.

The July box office increased approximately 11.7% compared to the sameperiod last year, primarily as a result of solid performances from movies suchas: Transformers, Harry Potter and the Order of the Phoenix,Ratatouille and Live Free or Die Hard.

And this momentum continued in August which exceeded last year byapproximately 22.5% led by the solid performances of the Bourne Ultimatum, the Simpson’sMovie, Rush Hour 3 and Superbad along with strong carryoverfrom July’s Harry Potter and Hairspray.

The September box office contributed to the overall quarterly box officegrowth with a reported increase of 7.3% over the same period last year. When wecombine our estimate for industry screen count growth of 1.4%, for the 14.9%increase in industry box office revenues, we can infer that industry box officeper screen grew approximately 13.5%.

On a per screen basis, Regal again outperform the industry average, as ourbox office screen growth was approximately 15% for the quarter.

Now turning briefly to Regal’s third quarter results, we are pleased toreport the following quarterly highlights. Attendance growth of 8.4% contributedsignificantly to admission’s revenue growth of 14.5%, and concession’s revenuesgrowth of 16.5%. Record quarterly adjusted EBITDA of 167.7 million and anadjusted EBITDA margin of 22.3%.

It’s important to know that we achieve this record result without the samebenefit from National CineMedia received in the comparable quarter of 2006.

We would also like to highlight certain key facts related to December boxoffice results. For the May through Labor Day weekend period the industry set anumber of records. A record four films reached $300 plus million dollars in boxoffice receipts and a record seven films reached $200 million plus in boxoffice receipts.

Also 17 films reached $100 million or more in box office receipts collectivelygrossing 55% more than the $100 plus million films in 2006 and 18.2% more than2003 when 17 films also achieved $100 million dollar plus mark at the domesticbox office.

Finally, the industry also set records in terms of the Top 5, Top 10, Top25, and Top 50 grossing films. Including the dividend announced today wereturned value to our shareholders with dividend payments totaling $0.30 pershare bringing our total dividends to approximately $17.26 per share since ourIPO in 2002.

Turning briefly now to an update on digital cinema, our digital conversionstrategy remains on schedule. Our goal at the beginning of the fiscal year wasto begin digital installations in our new theaters that opened during thefourth quarter of this year and in fact we opened our first all digitallocation in a couple of weeks ago in Las Vegas.

We would also expect to begin converting our existing locations to digitalduring the first half of 2008. Again we would expect that a complete conversionof our circuit will take approximately three to four years.

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

And last week, we announced the installation of an additional 25 REAL D 3-Dunits bringing our total to 134 units. We expect the numbers of 3-D equipped screensto increase over the next couple of years with 3-D technology being suitablefor as many as three to four screens in each of our high-volume 16 to 20-screenmega-plexes, and possibly 1,000 to 1,500 screens circuit-wide at the conclusionof the rollout.

Turning briefly to our outlook for the balance of the fourth quarter and theholiday films slate, during the first 3.5 weeks of the fourth quarter of 2007,the industry box office has decreased approximately 12.6% versus the priorcomparable period in 2006.

While we have experienced challenging box office comps during the first 3.5weeks of the quarter, remember November and December typically representapproximately 80% of the box office revenues for the fourth quarter and we doexpect box office performances to improve beginning in November with therelease of Bee Movie with JerrySeinfeld, American Gangster, withDenzel Washington and Russell Crowe, FredClaus with Vince Vaughn and Lions forLambs with Tom Cruise.

Other notable November releases include the 3-D release Beowulf with Paramount, Disney's Enchanted, and Mr. Magorium'sWonder Emporium from Fox. As we look a little further into December thefilm release schedule includes The GoldenCompass, with Nicole Kidman and Daniel Craig on December 7th, I Am Legend with Will Smith on December14, and National Treasure: Book ofSecrets with Nicholas Cage on December 21st and finally CharlieWilson’s War, with Tom Hanks andJulia Roberts on December 25th.

Briefly turning to the 2008, film slate, we remain optimistic regarding the2008 film slate. Many industry observers believe that 2008 film slate to bemore star driven and sequel driven with many strong films and an array of choicesscheduled for release.

The Disney Pixar comedy, Wally isjust one good example of the originality that will replace some of the sequelsof the past year. In addition to new, original product the film slate alsoincludes key franchise films including the next Batman which is titled The Dark Knight, The fourth IndianaJones which will also include Harrison Ford, the second installment of the Chronicles of Narnia: Prince Caspian. thenext film in the Harry Potter series and the 22nd James Bond picture againfeaturing the new Bond, Daniel Craig.

Summer comedies next year will include GetSmart with Steve Carell, the LoveGuru with Mike Myers, Sex and theCity with the original cast from the HBO series, Starship Dave with Eddie Murphy and three Adam Sandler filmsincluding You Don't Mess with the Zohan,the Pineapple Express and Step Brothers, which will also includeWill Ferrell and John C. Reilly.

The 2008, fiscal year also includes several family comedies in the film slate.Our Independence Day weekend next year will be occupied by the Will Smithadventure Hancock, which followsother highly successful Will Smith summer films in the past that included Independence Day, Men in Black and I, Robot.

Audiences will also get another chance to experience the 3-D film with therelease of Journey 3-D, a remake ofthe 1959 Jules Vern film, The Journey tothe Center of the Earth and the first wide release of a 3-D action film.

So, in summary, we’re pleased with the fiscal year to date box officeenvironment, and look forward to continue the box office success during thebalance of this year and into 2008. I’d like to now turn over the presentationto Amy Miles our CFO to discuss the company’s financial performance.

Amy Miles

Thanks Mike and good morning. Today I’d like to provide additional detail onRegal’s fiscal third quarter results and also provide an update with respect toour balance sheet and CAPEX.

Regal Entertainment Group reported total revenue of $752.9 million to 15 up$515.8 million from box office revenue, $210.9 million from concession revenuesand $26.2 million of other operating revenues.

The reported 14.5% increase in box office revenue consists of a 5.7%increase in the average ticket price per person and an 8.4% increase inattendance. In the quarterly results benefited from a16.5% increase inconcession revenue, resulting from again the growth in attendance, coupled withat 7.8% growth in concession per cap.

The increase in our concession per caps is due to an increase in pricing forthe quarter with a balance of the increase relating to concession standfriendly film product and well as favorable mix of concession products for thequarter.

The growth and admission in concessions revenue were offset by decline inother revenue due again to our modified exhibitor services agreement withNational CineMedia.

Turning briefly to our expense line items for the quarter, of film andadvertising as a percent of box office for the current quarter represented54.2% of admissions revenue.

Film rental and advertising expense increased by approximately 70 basispoints over the prior comparable quarter primarily as a result of thepreviously communicated blockbuster laden mix of film product during thequarter.

During the quarter the top ten pictures represented 67.2% of our box officerevenues versus 54.2% in the Q3 2006 period. We are pleased to report thatconcession margin again, before factoring in our vendor marketing programincreased 150 basis points over the comparable period of 2006 resulting in themargin of 86.1%.

Total rent expense increased $4.6 million, or 5.7% during the quarter andagain this is due to newer, more productive screens replacing older, lessproductive screens coupled with some inflation area increases.

Other operating expenses increased approximately $9.8 million, or 5.6% forthe quarter. Primarily as a result of increased attendance, increased labor andother non-rent occupancy costs. As wehave communicated in previous quarters the increases in labor costs areprimarily the result of state minimum wage increases and the non-rent occupancycost increases again relate primarily to our newer screens. The third quarterproduced adjusted EBITDA of $167.7 million versus a $138 million for the samequarter last year, and resulted in an adjusted EBITDA margin at 22.3%.

As a reminder, the $6.7 million of adjusted EBITDA included a contributionof approximately $8.9 million from National CineMedia versus a contribution ofapproximately $21 million, which was included in the prior year adjustedEBITDA.

We are obviously, pleased to report adjusted EBITDA, significantly higherthan expectation. And in addition to the out performance relative to consensusthe $167.7 million also represents a record adjusted EBITDA for the company.Our reported diluted earnings per share of $0.36 for the quarter also exceeded streetexpectations.

Turning briefly to our balance sheet and asset base, we ended the quarterwith just under $383 million in cash and a total debt balance of just under $2billion. Our pro forma leverage remains conservative as compared to our peersand provides the company financial flexibility. Our capital structure alsosupports focus on free cash flow and returning value to shareholders.

Turning briefly to CAPEX, capital expenditures during the third quartertotaled $24.2 million. During the quarter the company recorded proceeds fromasset sales of approximately $21 million. As such, our net CAPEX was $3.1million.

During the third fiscal quarter of 2007, we opened five theaters with 59screens and closed eight theaters with 72 screens. Bringing our total to 526 theatreswith 6,355 screens, this is a higher than expected proceed from asset sales. Wenow expect our full year net CAPEX to be in the range of $85 to $100 millioninclusive of $30 to $40 million of asset sales.

We’ve increased our estimates for both 2007 projected theater openings andclosings. And we now expect to open 11 to 13 theaters with a 170 to 190 screensand close 25 to 30 theaters with 200 to 220 screens.

Our previous estimate of an ending theater count of approximately 525 and a screen count of approximately 6375remain unchanged. Looking forward to the balance of the 2007 fiscal year, asMike previously stated, we’re obviously pleased with the year-to-date boxoffice.

And look forward to continued success over the holiday film slate and as wemove into 2008. That concludes the company’s remarks and we’ll now open theline for any questions you may have.

Question-and-Answer Session


(Operator Instructions)

Our first question is from Eric Handler with Lehman Brothers. Please stateyour question.

Eric Handler - Lehman Brothers

Hi. Thank you. Good morning. Two questions, first Amy when you look how overthe next 12 months in terms of your receiving your asset base from numberscreens, how many screens do you figure have, the potential to be closed overthe next lets say, 12 to 24 months?

And then secondly, with regard to your digital transitions, you’re, thedigital screen or the digital projectors that you’re requiring right now, isthat, you have like a handshake agreements with DCIP and the theatres. How arethose being financed?

Mike Campbell

With respect to the next 12 to 24 months let’s break that up into twoperiods. I would say that you know, at this point as we look forward, Eric, andit’s only harder to predict timing but you could expect screen closures I wouldthink for the 2008 fiscal period and somewhere, between 125 to 150, which is abit less than this year. And I would have that same estimate for 2009 period.

With respect to the digital projectors that we are doing today, it is ourintent as we finalized the Digital CineMedia deal that we will role into thatfinancing all of the theaters that we are doing today that I would considermore on a cash basis as we open up our new theaters with 2000, I mean I’m sorryin the fourth quarter of 2007. Our intent is to role those projectors into andoverall DCIP financing.

Eric Handler - Lehman Brothers

Okay. And just one quick follow-up, the 107 to 190 theaters that you’regoing to open this year total. Is that a sustainable number going forward?

Mike Campbell

No. We don’t believe that that will change materially going forward. We’vealways said we believe we could find 10to 12 good locations per year and our pipeline is beginning to fill in 2009 and beyond thatalso. We believe that’s a sustainable number.

Eric Handler - Lehman Brothers

Thank you.


Our next question is from Gordon Hodge with Thomas Weisel Partners. Pleasestate your question.

Gordon Hodge - Thomas Weisel Partners

Hi, just a couple of questions. One, Amy, just wondered if you can drill ina little bit on the working capital used in the quarter, in terms of what thecomponents were.

And then, if you can just give us a little more color on sort of why DCIP istaking as long as it is, is it just earning cash with the studios, are thereparticular issues that are contingents or having trouble getting work through?

And the last question is in the company’s experience, where we've had astrike or a threaten strike, what sort of fall-out have you seen in terms ofbox office and product flow in the past month?

Amy Miles

Sir, going with if you first initially focus on the change in workingcapital.

Gordon Hodge - Thomas Weisel Partners


Amy Miles

They were $70 million dollar use, $46 million of that relates to payment ofthe MTM IPO proceeds taxes in thecurrent quarter.

Gordon Hodge - Thomas Weisel Partners

Got it, okay, that’s it.

Amy Miles

Okay. So if you back that $46 million out.

Gordon Hodge - Thomas Weisel Partners


Amy Miles

You have a negative $28 million, which compares to a negative $63 millionlast year. So absent the change relatedto the National CineMedia, you’ve actually seen kind of an upkick in ourworking capital comparing the third quarter this year to last year. And most of that, what creates that $28negative during the quarter would be film payments.

Gordon Hodge - Thomas Weisel Partners

Okay, terrific.

Mike Campbell

Gordon, regarding DCIP, we said in the past, that we want to be sure that weget it right not necessarily quick, but we’re still on the timeframe that we’vebeen announcing the marketplace for the last year or so.

But it is a very complex transaction and at the end of the day, I think theresults and the transaction that springs from this will be good for all themember companies. But, when you’re dealing with seven or eight major studios,plus you have Regal, AMC and some are all involved, I mean that’s just a lot ofparties involved and there are a lot of I’s to dot and T’s to cross.

But I mean we’re getting there, we’re on track, and we believe at the end ofthe day we will have a digital rollout playing that’s very favorable to all theparties. And bear in mind to that this DCIP rollout represents pretty close to50% of the industry so that’s a big step from the studios as well as ourinitiative.

Regarding the strike, nobody likes the specter of strike and these contractscome up for renewal every five years as you’re probably aware. The last time a strikeactually occurred was in 1988. And in 1988, I was in the business then. It wasfairly good year at the box office and what was interesting is that 1989, whichwas the year after the strike was one of our record years for the 1980’s.

So, I’m not trivializing the impact of the strike, but at the end of the dayit may or may not happen, most people in Hollywood are saying they think therewill be a strike this year. But there’s been a lot of stock piling of filmproduct, and going forward, there is lot of accelerated production.

And I would say that our business historically has been impacted much lessthan let’s say television production which is also covered by these same unions.Where television shows are in many casesstill, only a few weeks prior to airing on the networks our films are usuallyin the can in many cases 6 to 12 months before the product is released, sowe’re keeping our fingers crossed but I don’t think it’s a killer for ourbusiness by any means.

Gordon Hodge - Thomas Weisel Partners

Thank you very much.


Our next question is from Hunter DuBose from Morgan Stanley. Please stateyour question.

Hunter DuBose - Morgan Stanley

I have a few questions for you the first one is, I just want to clarify yourearlier remarks regarding screen openings for the next couple of years. And if we were looking at openings of about 170to 190 for the next two years closings and the reason 125 to 150 that tends toimply net screen growth of about 40 to 45 screens per year. I believe you guyshave added towards your net screen growth in the next couple of years so I justwanted to clarify where we stand on that?

The next question is has there been any update on the final economics and businessmodel for the digital 3D deployment, how that looking and do we have any partyon finalizing that and then finally given the 4Q film mix what guidance can yougive us regarding concessions per cap or ticket price growth and film cost?Thank you.

Amy Miles

Okay. I’ll take the first question and Hunter you probably will have torepeat some of that as we go through just to make sure that we capturedeverything but, the sustainability to my point is always little bit harder topredict timings, but the 10 to 12 theaters are just on the outside of ourhistorical range and that gets you to the 170, 190 on-screens each year.

I think if we continue to move to a R&D guide may be closer to flat, butwhat we are talking about here is that probably a slightly up screen count in2008 and 2009 and I think that’s just driven more by, we’ve announcedaccelerated closing during this year so that moves those away from 2008 and it’sjust as we continue to work through what’s left on the balance sheet, I’m sorry,on the assets base for closure.

You look back over the past couple of years. We walked through a lot ofthose closure situations. So going forward you always going to have timingsituations, but I think in that, I think what I said was 150 to 175 of closure so that would produce aslightly increasing asset base versus a flattish. It’s not that material thoughfrom that number difference.

Mike Campbell

Hanna, what was your second question?

Hunter DuBose - Morgan Stanley

The second is question is there any update on the economics of the 3Ddeployment in terms of finalizing a business plan with Real D.

Mike Campbell

The last 25 units that we announced that were rolled out just a few weeksago were with Real D but we haven’t structured any long term agreement withthem and we stated publicly that we are not going to roll out any additional 3Dunits beyond the ones that we just rolled out until we have an overall digitaldeal in place with the studios.

I think this and that should clearly be the case before we have need foradditional 3D screens for the next release post available, so we are alsoputting the breaks on 3D until we have the overall digital rollouts, signed,sealed and delivered.

Hunter DuBose - Morgan Stanley

As we think about the longer-term cost of deploying 3D when you actually getto that point, I believe that you previously guided towards expectations of$25,000 per screen, but I believe that Real D is now talking about more of arevenue sharing type model. Can you give us any comments on that?

Mike Campbell

Here’s what I believe, number one and we like the REAL D product a lot. Butthere is competition beginning to develop in that REAL D or excuse me 3Dtechnology, and here again I think this is a, REAL D is a great technology. ButI think competition will bring some flexibility into the market place as to howthese deals are structured going forward.

I think what Amy had said previously is that the $25,000 was what we hadbeen doing initially in that field but I believe that going forward that ouroptions range from investing hard dollars ourselves, which I can assure youprobably won’t be $25,000 because in bulk we would not agree to that.

That can range from investing those dollars ourselves to investing nodollars and coming up with some revenue share type arrangement. But we’re stillnot into the overall roll-out enough to give you any real insight into that.

Hunter DuBose - Morgan Stanley

Great, okay, and my final question was just simply regarding theexpectations for ticket prices, concessions per cap and film cost for thefourth quarter based on the film ex?

Amy Miles

Yes, what I would expect that the ticket price and again, you can have vagariesit’s going to depend on what films are successful. But if you just look at thefilm slate, I would expect our ticket price to looks somewhat like it did inthe third quarter.

And then as you move to the fourth quarter, the concession costs get littlebit more difficult, because as we said previously, some of the price increasesthat we benefited from the first three quarters of the year will cycle againstin the fourth quarter.

I don’t have specific guidance, but I do think you'll be little bit temperedfrom previous quarters. And again that could be offset by this very strongperformance and concession friendly film ex that I, just copying it what we donow as we are copying against some of our price increases in the fourthquarter. Film cost I think you also ask about, I wouldn't expect it to be onmaterially different from the fourth quarter of 2007.

Hunter DuBose - Morgan Stanley

Great, thank you very much guys.


Our next question is from Matthew Harrigan with Ferris Baker WattsIncorporated. Please state your question.

Matthew Harrigan - Ferris Baker Watts

Congratulation on the results, I have two questions relating to 3-D.Firstly, on Beowulf what sort ofprice premium are we likely to see on that? And then secondly you announced anew arrangement with IMAX that I thought was a little surprising. You sounded alittle bit less guarded in your tone then you had previously.

And I was curious is to how that messed with your ongoing digital rollout,since it seemed for a while that you were distinctly moving away from havingmuch of an IMAX footprint?

Mike Campbell

Okay, regarding Beowulf. Westarted out our 3-D a of couple years ago, with about a $1.50 premium. Ibelieve we’re currently at about $2.50, Beowulf we may be up to around $3premium versus the average ticket price.

And over time I think we’ve said before that by 2009, 2010 as we getstronger live action product out there, big budget, big stars, that premium cango to $4 to $5 per tickets. So, we're progressing and the good news is we haveno push back really from a consumer they recognize this as premium experienceand they are willing to pay up for that experience.

And you’re right about IMAX, we have over time somewhat changed our opinion ofIMAX, I really believe it's due to the fact that their business model goingforward is a better business model than we had been presented in the past.

You know beginning with the fact that they now do have a digital solution,because we believe that IMAX historically was going to be in tremendousdisadvantage if they didn’t have a digital solution where you are spending upwardsof $40,000 for a 17-millimeter print.

Secondly, the early IMAX rollout that we engaged in several years ago,essentially, we footed the whole bill. And those auditoriums were costing asmuch as $3 to $4 million to build and equip.

We currently have a new IMAX model and that model involves IMAX andinvesting substantially all of the dollars, our investment is fairly minimaland we’re getting a very good return on that capital investment in thesesituations where we’re going and converting existing large format auditoriumsto an IMAX model.

And also I believe lastly that IMAX has accepted the reality that otherpremium experiences such as Real D, 3D are going to be around, and IMAXbelieves that they can still engage in the exhibition of those same types offilms, but leverage off of the IMAX brand and the IMAX Sound System and so on.

And I do believe that they are going to get some additional studio supportas a result of all the things that I just mentioned.

Matthew Harrigan - Ferris Baker Watts

Thank you.


Our next question is from Michael Savner from Banc of America. Please stateyour question.

Michael Savner - Banc of America

Good morning, thanks. Amy, can you just talk little bit about the leveragein your other theater operating expenses. It looks like this year it’sbasically on track to grow more or less in line with top line growth?

Going forward, can we expect that you’re going to be able to squeeze alittle bit of leverage out of that, or look at more pronounced leverage or doyou feel comfortable that, that’s where there is leverage?

Amy Miles

Hi. With respect to the operating expenses, where we see most of theincrease this year has been in payroll area, primarily as it relates to stateminimum wage increases, so you saw some of those increases ’06, a higherpercentage of states increasing in fiscal 2007. So as we move forward in 2008, fewerstates are on the list for minimum wage increases.

And then when you took that back and talk about that from a Federal wageperspective a lot of the states where we operate having recently had their ownincreases are above the Federal minimum.

So, yes I would expect that going forward you would see more operatingleverage, in the operating expense line item, hopefully returning more toinflationary increases versus top linetop increases.

Michael Savner - Banc of America

Great, and then going back to the ticket price increase question and maybetaking a step back broader question about it. This year based on the guidanceyou just gave, kind of, rough guidance for the fourth quarter, it looks liketicket prices will be at least, call about 6% of the year.

Even assuming there was favorable film mix that helps contribute to that itis still at least double the historic average. Would you feel more comfortablewith us looking in ’08 and beyond back in historical ranges of price increases?Or you feel that’s something above the historical 3% rates is at least in thenear terms still sustainable?

Amy Miles

Yes, I think that, there’s a couple of things to consider in there. I thinkif you look at our base ticket price increases and say, next year is that, inthe historical, I’ll ballpark that at 3 to 4%.

We would always forecast around that level, Michael. But what has hit us inthe company some this year in addition to the IMAX and we would also, I’m sorryto the film product mix would be the premium pricing on the IMAX products andthe Real D products. So, as we move into next year and that you start to seethe film slate for 3D shake-out, the IMAX film shake-out and again we've added,we’re up to a 134 screens now for Real D. Hopefully we'll also have somebenefit of them from what I’ll call premium experienced pricing.

Michael Savner - Banc of America

Terrific, that's helpful. And then one last one just too follow-up Mike onyour last answer with regard to the IMAX in given your more enthusiasticapproach given in their new business model. Is there any concern or any risk ofdollars being something to the ground and if their business model proves not tobe sustainable or they run into further financial problems are you concernedabout having capital at risk and or would you consider taking some kind ofcapital stake in IMAX if necessary to help sustain that model.

But not that I am insinuating that they are in jeopardy. But certainly they have had a rough couple of years?

Mike Campbell

I don’t think we would have any interest in taking a financial stake in IMAXthat’s not one of our core competencies we don’t profess that it would be goingforward.

Regarding the risk, bear in mind the auditoriums that work in turning now toIMAX are in theaters that we built new with a large screen format in mind whenwe designed those and we can just as easily take that IMAX equipment out ofthose theaters as easily as we just put it in and here again they are footingthe bill for that risk.

As far as we do have a revenue share arrangements but we're very, very littleat risk. The capital we're investing it’svery small and we have the option of going back to business as usual.

Michael Savner - Banc of America

Terrific, thanks very much.


Our next question is from Barton Crockett with J.P. Morgan. Please stateyour question.

Barton Crockett - JP Morgan

Okay. Great, thank you. I wanted to ask first a question about just if youcould update us on how do you see the acquisition environment at this time interms of people's willingness to sell the opportunity for attractive values foryou.

Mike Campbell

Yes, acquisition environment, I think, it’s as we've stated the last coupleof quarters, I mean, we do believe that its, that the environment is conduciveto having people sell assets, sometimes that process takes a while to developbut after we had good 2006, 2007.

I think certain companies that have certain types of capital structures,investor bases, are to sell and I can state that it is a healthier acquisitionenvironment that it was last year and a year before. We haven’t announcedanything yet.  There have been very fewannouncements but my belief is that those dialogues are taking place throughoutthe industry today.

Barton Crockett - JP Morgan

Okay, great. And then turning back to the 3D question –that was raised alittle bit earlier I just want to be clear the different economic models sothere's kind of a fixed investment of $25,000maybe dropping to $20,000 per year which is how I think we and others have beenseeing versus kind of a variable rev share on the 3D.

At the end of the day depending upon where you set that rev share it could be a much lower kind of profits scenariofor you guys than on the fixed cost environment and I think a little bit of fearout there that could be the case. I am just wondering if you could tell us, giveus any guidance on whether the difference in fixed costs versus variable how meaningful of an impact that have on youreconomic return on 3-D?

Mike Campbell

Clearly we're not going to do any type of long-term mass rollout if it’s notfavorable to us economically. But just kind of getting back to what I saidearlier I think there is a competitive environment beginning to develop in the3-D arena.

We really like Real D but as a result of that competitive environment I meanthere is a certain manufacturer from Asia that's proposing a model with a very viabletechnology that involves just a one-time purchase of the hardware and softwareand no on going investment or revenue share.

So I think those type of environments will allow us to cut a deal goingforward that is much different than what you see today.

Michael Savner - Banc of America

Okay. Just a follow-up on that that competitive environment, is there anytype of locking in at the studio level, in other words, if one manufacturersgets embraced by all the studios, one system Real D versus this Asian companyor Dolby, would the studio movies then only be compatible with that system, isthere a potential kind of proprietary lock there or you envision kind of anopen environment where the studio movies would be playable on anyone’s 3-Dsystem?

Mike Campbell

I think that's mainly the history so far the studios have supportedeverybody’s 3-D technology. And clearly, if you had a consistent standard itwould be better for everybody but I don't know whether that will happen in the3-D arena or not.

But I don't think the studios are going to go out certainly as a group andendorse one technology, I don't think that's good for them and I don't think it'sgood for us. But at the end of the day there maybe one dominant technology thatemerges and dominates the industry but, I think it’s just too early to tell yet.

Michael Savner - Banc of America

Okay and then just a final thing on 3D, could you give us a sense of whatyou are seeing with the latest 3D release,Tim Burton’s I know that in the past these movies have done 3 – 4x box office per screen on 3D versusregular and I know that the Tim Burton’s open well.

But if you could give us an update on what you are seeing now in terms ofthe 3D interest and your early sense of how bigger reaction we might see onavailable for movie which, I think there’s been questions just given thecontent, and the rating and the style of it?

Mike Campbell

We roll out on additional several units 25 units to take care of this latestre-release, the second re-release of Tim Burton’s Nightmare Before Christmas and two interesting things that we saw. Number one the theaters, the limited number oftheaters that we have this technology in place last year when it was releasedonly dropped about 30% on the second re-release, which is in today’senvironment if you have any film that goes from one week to the second week andonly drops 30% that’s great so, year one to year two it only dropped 30% inthose theaters.

And in some cases those theaters had more competition in the marketplace,more real D units were out there but the ones where we rolled out new units that did not have thetechnology last year we saw that same type of performance that we talked about before relative to thoseindividual markets and that is that the per screen average for this 14 year oldmovie that was re-released in 3D last week and in all these new locations itwas the top grossing film at that complex in every one of those locations byfairly significant number.

So we are still encouraged by what we see, I mean there clearly will be somedilution over time as the industry rolls out more, and more 3-D units, but bearin mind there will be much more product as that happens. So, we’re still verybullish on the long-term prospects and we’re very interested to see whathappens when we get live action.

Regarding Beowulf, we’ve seen somefootage on that. Technologically, it’sfantastic technology, I mean it is, it’s not a cartoon, its stop motion, youknow capture motion technology which is kind of like combining animation with liveaction, it’s an unusual look to it; it’snot a kid’s fairy tale. So I don’t think you’re going to get your Pixar audience oryour DreamWorks animation audience. But I still think people will be verypleased with the technology, but it’s not meant to be, in my opinion, a broadbased, film like some of ones we’re expecting in the future.

Michael Savner - Banc of America

Okay, great, I’ll leave it there. Thanks a lot.


Ladies and gentlemen we have reached the allotted time for Q&A. I wouldlike to turn the floor back over to management for closing comments.

Mike Campbell

We appreciate you dialing in for our third quarter conference call and lookforward to having you again in fourth quarter. Thank you.

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