Carmike Cinemas Q3 2007 Earnings Call Transcript

Carmike Cinemas Inc. (CKEC)

Q3 2007 Earnings Call

November 6, 2007 5 pm ET

Executive

Nikki Sacks - ICR

Michael Patrick - Chairman, President, CEO

Richard Hare - SVP, Finance, CFO

Fred Van Noy - SVP, COO

Analysts

Michael Savner - Banc of America Securities

Barton Crockett - JP Morgan

Jeff Logsdon - Banc of Montreal

Presentation

Operator

Good day, everyone, and welcome to the Carmike Cinemas Third Quarter 2007 Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to your host, Ms. Nikki Sacks of ICR. Please go ahead, ma'am.

Nikki Sacks

Thank you. Good evening. This is Nikki Sacks of ICR. Before we begin, let me remind you that in accordance with the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, the company notes that certain measures to be discussed by members of management during this call may constitute forward-looking statements. Such statements are subject to risks, uncertainties and other factors that may cause the actual performance of Carmike to be materially different from the performance indicated or implied by such statements. Such risks and factors are set forth in the Company's annual report on Form 10-K for the year ended December 31, 2006.

I would like to turn the call over to Michael Patrick, Carmike Cinemas' Chairman, CEO and President. Michael?

Michael Patrick

Thank you, I am Michael Patrick. With me I have Richard Hare, our Chief Financial Officer and Fred Van Noy, our Chief Operating Officer.

We would like to welcome you to our third quarter Earnings Call. The buzz for the summer centered around three sequences, Spider-Man 3, Shrek 3 and Pirates 3. These movies had high expectations going into the front of the summer and little attention was given to the third quarter movies slot. Carmike did very well with the hit movies in July, especially Transformer, Harry Potter, Order of the Phoenix, Ratatouville and the momentum continued into August for Carmike with Bourne Ultimatum, Rush Hour 3 and Super Bad.

Our third quarter box office revenue increased 3.7% compared to the third quarter of 2006 and we had a 3.9 increase in our concession and other revenue quarter-over-quarter. If you recall we had a record breaking box office in third quarter of last year as a result of Pirates of the Caribbean and specially Talladega Nights, which made for a tough comparison in our current period.

Totaling our operating expenses the same level, as the third quarter of 2006 enable us to generate a 59% increase in our operating income over the same period last year from $8.7 million in 2006 to $13.8 million in the third quarter of 2007. Fred and his team held the line on operating cost and our general and administrative cost were inline resulting in this quarter-over-quarter improvement. Richard will give you a detailed report on our financial performance in a few minutes.

We are pleased to report that we will be finalizing our digital projection roll out by November 15 where the total screen count of 2197 in this new format. Retooling of our industry to the newest technology has modernized our circuit and placed us in a unique position of being able to participate in our industry's technical imagination and special effects and flexible requirements. We are very excited that this is now behind us and we are prepared for anything Hollywood throws our way in the future.

3D technology continues to press theatre operators with the requirements for major capital investments in digital projection with 3D equipments. Our 3D expansion program will be completed by the opening of Beowulf on November 16 and we expect to have 191 theatres with 431 screens 3D capable available for this much anticipated movie.

Over 80% of our digital locations are 3D capable. Our 3D footprint allows us to make current and future attendance demands in our markets. To capitalize on 3D demand, our coverage by location varies from one 3D screen in our smaller theatres, to a maximum of four 3D screens in our high volume theatres. This strategy not only allows us to capitalize on opening weekend attendance, but allows us to hold 3D content longer by moving the movie to smaller auditoriums as the audience attendance demands.

We are already seeing an impact on 3D with the re-release of Tim Burton's Nightmare Before Christmas, offered only in 3D. We had a 144 play day. And on our opening weekend we were able to increase our share at the national box-office percentage by as much as 250% compared with our normal weekend average share.

As we expand our 3D capabilities deeper into our smaller markets, we found very little pushback from our customers on the additional up-charge for 3D glasses. Judging from this response, we are encouraged to see that our consumers are willing to pay additional fees for something fresh and unique, a characteristic 3D obviously [runs].

3D not only impacts the studio's product, but also opens the doors for alternative content by offering new avenues to our revenue stream. An example, we partnered with National Geographic with the 3D release of a documentary "Sea Monsters 3D" which played in 71 locations when it opened on October 19th. Although this content somewhat stayed under the radar screen nationally, we are very pleased to introduce this kind of material to small town America. This 40 minute film also required a surcharge for 3D glasses with little resistance from our customers.

This result of the play day has opened the door with National Geographic and we expect to screen more 3D products from their library in the future. We are also looking forward to the much anticipated U2 3D concert, which is expected to be released early in the first quarter of 2008.

The added value of 3D continues into the fourth quarter, with opening of Beowulf. We are now positioned to take complete advantage of this film, opening on November 16th. At this time, we are scheduled to play 419 3D screens with additional 104 2-D screens on this movie. The 3D effects in this movie represent the best technology can offer and exceeds 3D beyond the traditional animated family movie.

The remaining films for the fourth quarter look encouraging. Movies such as Fred Claus, starring Vince Vaughn and Enchanted should perform well with our families, which have historically been our primary audience during the holiday season.

Golden Compass, I am Legend with Will Smith. National Treasure, Book of Secret starring Nicholas Cage and Charlie Wilson's, War with Tom Hanks carry us in to the New Year.

As you know, we own a third of our real estate. We just completed an amendment to our credit facility that gives us the ability to monetize up to $175 million of properties. Richard, will give you more details about this in a moment.

Overall, we had an okay quarter. Our revenue was up $5 million. Our team was able to keep the cost in line. We have more flexibility in our credit agreement and our digital installation program is done in two weeks. We are way ahead on our 3D installation schedule and prepared to take full advantage of the opening of Beowulf.

I would like to thank you once again, and I would like to turn the call over to Fred Noy for comments on our operations.

Fred Noy

Thank you, Michael. I would like to begin by reiterating what Mike mentioned regarding our digital rollouts. We were in the final weeks of our conversion. With the last location on schedule targeted for our new 12 screen theater in Cookeville Tennessee, which opens November 16.

The Christie Digital projectors are working extremely efficiently and we have not experienced any mechanical problems with the units. Our associates have been able to make the transition from 35millimeter mechanical system to the state-of-the-art, highly technical and digital projector with little or no hard ships and the general feedback has been extremely complementary.

This technology continues to provide our customers a professional presentation and allows us the flexibility to manage the needed seat demand, with a push of the button by moving content from auditorium-to-auditorium based on our needs at the moment.

Our 3D rollout is also near completion and as with our digital projection system. Our 3D system is performing very well for us with no technical issues to be concerned with. At the completion of the 3D rollout schedule to be with the opening of Beowulf, we expect to have 431 screens 3D capable.

As mentioned in previous conference calls, we do have an option to install an additional 100 3D units in 2008 with our realty contract, which will complete any future needs of the circuits.

In the beginning of 2007, we started to see some footage and receive preliminary feedback, from the distributor of Beowulf, on the improvements of the 3D effects in this feature and we knew that our 3D program needed to be completed by the opening of this movie.

Currently we have 419 screens booked in 3D and an additional 104 2D screens, with many of these 2D screens being at the same location with 3D. As Mike also mentioned earlier the movie: The Nightmare Before Christmas 3D opened October 19 on 144 screens for us with many of our locations reporting this movie as the highest grossing film in the complex.

We are also able to introduce to our markets for the first time, a National Geographic presentation called Sea Monsters 3D in 71 of our locations. Although this feature was only approximately 40 minutes long, it was our 11th highest grossing features for the opening weekend in our circuit.

We were very pleased with these results and we believe that this has opened the door with National Geographic and their films for further expansion in the 3D world of entertainment.

We continue to test alternative content to explore revenue opportunities and we are currently working on a special live presentation of the upcoming West Virgina versus Louisville NCAA football game in our theater in Morgantown, West Virginia. And we are also scheduling a one night only event concert with John Bon Jovi this week in 48 locations.

Both events will be priced at $10 per ticket. As we cultivate this program, we feel it is important to establish a one price ticket for these events, not only to give an added value impression to the product but to also guide waning expectations, have reduced admissions for children, senior citizens, et cetera. So we do not below our average ticket price. It is our expectation to gradually increase the price of these events as they become more popular.

Moving on to some operational notes about the quarter. We are pleased to report that our average ticket price increased quarter-over-quarter by 6.6% and our concession and other per caps increased 7%. But, more importantly, we have broken the $3 concession in other sales per person marked for the quarter, which we feel is a milestone considering our small markets.

We have experienced quarter-over-quarter increases in our average ticket price, as well as our concession and other per caps, in every quarter we have reported in 2007. These increases are primarily due to the price increases we put in place, both in November of 2006 and August of 2007. We will be reviewing our pricing structure in the near future for further opportunities.

I would now like to give some insight on our attendance numbers. We were down quarter-over-quarter in attendance by approximately 400,000 people. As you know the company had a record attendance quarter in Q3 of last year, which certainly factors into this variance. I would like to point out that we operated 21 less theatres in the third quarter of 2007, against last year's quarter. These closed theatres represented about 354,000 in attendance. Another component that we feel adversely affected our attendance is that our discount theatre operation. Our discount theatres experienced a decline in attendance of about 448,000 in this quarter compared to the same quarter last year.

Included in this 448,000 decline are approximately a 154,000 attendees from closed discount theatres mentioned earlier. We feel one of the reasons for the drop in our attendance, in our discount theatres, is the window shrinkage to DVD.

Although the majority of our discount theatres operate at a positive cash flow level, it is our plan to reduce the number of discount theatres in operation as the leases expire through property sales or by individual closing as their performance dictates.

We, currently operate 37 discount theatres as of this date. Our cost control measures are still on force and we experienced savings in our supplies, our employee benefits, our telecommunications and our property taxes. However, we felt some pressure on our salary cost due to minimal wage increase in utility cost, quarter-over-quarter.

Our concession cost rose slightly this quarter, but remained flat year-to-date.

I would now like to turn the call over to Richard for more details on the financial side.

Richard Hare

Thanks Fred and Good afternoon. Let's take a look at the financial highlights for the third quarter. We had a solid third quarter as our total revenue was up about $5 million over the prior year quarter. The box-office increased $3.3 million to $88.7 million, and concessions and other revenue increased $1.7 million to $46.5 million. At the end of the quarter, we had 270 theatres and 2,369 screenings.

During the quarter, we closed 6 theatres, so our average screens per theatre increased slightly to 8.7 from 8.3 compared to the prior year period. Our box-office per screen increased 6.6% during the quarter. Our attendance on a per screen basis remained at approximately 6.4000 people per screen, which was driven in part by the strength of our box-office in the prior year.

On a per screen basis, our attendance increased approximately 10% from the third quarter of '05 to the comparable period in 2006, which was significantly, ahead of the industry, which makes it more difficult comparison this year. Our average ticket price increased 6.6% to $5.79 compared to $5.43 for the third quarter in 2006. We continue to increase our ticket prices in the state for the federal minimal wage increase is higher than the state wage.

Concession sales, in other per patron were $3.04 for the quarter compared to $2.84 in last year’s period, which resulted in a 7% increase. As a reminder, our product offering is somewhat limited to soft drinks, pop corn and a small amount of candy. Film exhibition cost during the third quarter, decreased 300 basis points to 55.2%, compared to the prior year quarter. As our concession revenue increased during the quarter, our concession cost increased $600,000. As a percentage of concession in other revenue, our concession cost increased to 10.6%. For the nine month period in 2007 and in 2006, concession cost as a percentage of concession in other revenue remains flat.

As a percentage of total revenue, theater cost fell to 38.6% compared to 39.9% in the third quarter of 2006. In total dollars, our theater operating cost increased $300,000 to $52.3 million. This increase was primarily the result of increased salaries and utilities cost. As Fred mentioned, we continue to see improvement and reduction in several areas within this expense category. The increase in our top line revenue coupled with our improvements in film exhibition costs and other operating costs generated a 10% increase in theatre-level cash flow for the quarter.

Theatre-level cash flow improved to $29.1 million in the quarter compared to $26.5 million in the prior year quarter. Theatre-level cash flow was defined as operating income before general and administrative expenses, depreciation and amortization and gain or loss on the sale of property and equipment.

General and administrative expenses during the third quarter of 2007 were down $2.1 million or 28% to $5.3 million compared to last year's period. This reduction is primarily due to reduced professional fees over the prior-year quarter.

As a side note; our real estate group continues to work on finding the best use of our portfolio of theatres. Excess property is the result of having additional property adjacent to an existing theatre, or it can be the result of closing a location. We just recently sold a property in October and we will be recording $2.7 million sale for this transaction in the subsequent period.

Our operating income increased 59% to $13.8 million for the third quarter of 2007 from $8.7 million in the same period in the prior year. Interest expense was down $400,000 to $11.8 million from the prior year period due to lower interest rates on our outstanding debt and a slight reduction in principle.

As we disclosed in the second quarter of this year we recognized the gain on the sale of our investment in a third party ticket distributor. During the third quarter of '07, we recognized the small additional payment we received as a result of the sale of this investment.

Capital expenditures for the year-to-date were approximately $15 million net of our landlord reimbursements, primarily from maintenance and the installation of our new digital program. We will be adding one new theatre in the fourth quarter of '07 and our cash needs on a going forward basis remain modest and we expect to spend approximately $25 million for the full year in 2007.

As of September 30, 2007, Carmike's cash and cash equivalent balance was $23 million and the company had total debt outstanding, which includes long term debt and capital lease on long term financing obligation of $437.6 million. The company's current debt structure excluding the capital lease and financial obligations consists primarily of our borrowings under our existing credit agreements.

As of the end of September 30, 2007, we had $163.3 million of borrowings under our term loan and $154.1 million of borrowings under the delayed draw facility and our current revolver remains untapped with $50 million of availability.

As Mike mentioned, shortly after the third quarter ended, the company proactively amended its existing credit agreement. This amendment allows Carmike among other things greater flexibility by allowing for potential sale of lease back transaction and it amends some of our compliance ratios.

Our leverage ratio of consolidated total debt to adjusted EBITDA remain at 4.75 to 1 and our interest coverage ratio is now 1.65 to 1 until the maturity of the credit agreement. We also took the opportunity to amend the definitions of EBITDA and interest expense to account for certain non-cash items. Under the terms of the amended credit agreement, the consolidated debt continues to exclude long term financing obligation of approximately $84 million. We refer you to our Form 8-K, filed on October the 22nd for complete details of the amendment.

In closing, we had a solid box office during the quarter, our team focused on keeping our cost in line and driving improvements. We finished our digital roll-outs and we are leveraging our leading position in 3D technology.

We certainly would like to thank you for listening to our call today. At this time, operator, we would to open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we got first to Michael Savner of Banc of America Securities

Michael Savner - Banc of America Securities

Thanks very much. Michael, I'm sorry to really strongly disagree with you but, I think your shareholders, they have every right to be pretty furious at these results, results that you are calling solid. From the way, I hear you, you're spending the vast majority of your call talking about digital and 3D, but you've underperformed the industry by just an enormous amount. If my math is right, even adjusting for your tough comp year-over-year in screen closures, it wasn't even closed and this has gone on for quarter-over-quarter.

How are you going to address this, what's your Board of Director's view on the company's performance, on management's performance, other businesses, the second one theatres that you need to get out of. The rate you're going, digital and 3D isn't going to get you there. I don't see how that's going to move the needle if you're underperforming on an attendance basis by hundreds of basis of points. I thought that you are being [born], but I seem be to seeing something differently and maybe I'm seeing it completely wrong, but it doesn't look good to me.

Michael Patrick

Well my comment on that is that we are performing very well on the larger pictures that opened. It's on the limited pictures that are coming out of Hollywood. especially the pictures you saw in September and October on a limited release. The Carmike did not play many up because it wasn't offered in our size market.

We believe this trend will change, when you will see more independent product that plays better in our market. But we blame it, basically on the product deploys in the small town market or the number of pictures that was offered to us in our small market this year.

Michael Savner - Banc of America Securities

Well, may be I should ask it in a more constructive way. This is been an ongoing trend, if we go back to apples late last eight to ten quarters, your out performance versus industry on a screen-by-screen basis, may be one or two quarter. So, do you think there is change then in business? Is there a change in the type of film product that Hollywood is putting out that isn't working as well for you or is there change to your business model, that you think you need to address?

Michael Patrick

I think it's the change in the independent type product that Hollywood is bringing us, not just the majors and independent distributors, but the product that we normally saw is just not what we are seeing regularly today. It is not playing well in the market, as far as what we call: “artistic pictures” or “limited pictures”. They are just not playing. We are doing phenomenal on the pictures that open, like this weekend on the Bean movie and especial on American Gangster, but it is just the lower tier pictures that are not performing well.

Michael Savner - Banc of America Securities

Okay. Thank you.

Operator

(Operator Instructions). And we will go to Barton Crockett at JP Morgan. Please go ahead.

Barton Crockett - JP Morgan

Okay great. Let me see I wanted to, first I believe with severance comments so for now I will just talk a little bit about what you are seeing with the 3D relative make sure you have a couple of thing straight. First, what are you looking for in terms of your average up charge for the 3D ticket and what are your expectations in terms of attendance for screen on the 3D screens versus the normal screens? And then secondly in terms of Beowulf, if you could comment little about how you think that movie excluding the 3D effect, how that will apply to your audience in terms of the rating, in terms the overall orientation of the content?

Fred Van Noy

Barton, this is Fred Van Noy. We typically like to charge two bucks as an up charge for the 3D glasses. We are going to continue that trend. We are testing in several markets the threshold of $2.5 for Beowulf. I think that our flexibility on that up charge will be on the quality of the movie going forward. If we think we can get more in $2, we are going to certainly chase that level. If with that something in the range of a National Geographic alternative content, we may push it back down to two bucks. Its going to depend on the movie and what the market will bare, but we continue to look at where we can make opportunities happen on a pricing structure that and we look at is as a film-by-film case.

Barton Crockett - JP Morgan

Okay, so but, in terms of you are taken the quality of the movie what’s your, have you seen (inaudible) had a take on how well you think it will play with your audience?

Fred Van Noy

I have not seen the entire picture. I’ve seen peaces of it. We are very optimistic with the movie. Of course, we accelerated our 3D program for this particular movie and we've got it -- we are comparing it to the movie 300 earlier in the year as far as the same audience that this movie should attract. So that's what we are looking at.

Barton Crockett - JP Morgan

Okay. And then switching gears to the covenant adjustments for next year, obviously nobody really can know much about what the box office is going to do at this point. Everyone will have their take, but one thing I think you guys might be able to help us with this to give us some sense of how much revenue at our box office or how much attendance you would need to be comfortable be within the covenants in the new amended agreement?

Richard Hare

Barton, this is Richard. We felt like it was important to give us ourselves some flexibility on a going forward basis with the amendment to the credit facility. We addressed that in several ways with the leverage ratio and the coverage ratio. We didn’t look at it for say on a going forward basis in terms of attendance, but on historical EBITDA that the company has generated. So we felt like it was important to make sure that those levels stayed static as opposed to stepping up in future periods.

Barton Crockett - JP Morgan

Well maybe another way to put the question is how much revenue do you think you'd need to get the EBITDA in other words make you, put you comfortably within the covenants?

Richard Hare

I think we are there now. We are very comfortable where we are with covenants.

Barton Crockett - JP Morgan

Okay. Alright. I mean I guess talk with better side. And then in terms of the properties in other flexibility I guess the seller did some lease back. Can you give us some sense of how much potential cash value you think you might have, if you were to sell those properties how much cash would you bring in the door from that?

Richard Hare

Well, the amendment does give us the opportunity to explore monetizing our assets and delivering the balance sheet. Barton, we are at end of the preliminary phase of evaluating this type of transaction so it is kind of too early for me to predict the potential impact the company would have or the likelihood of completing a transaction in the near term.

Barton Crockett - JP Morgan

Yeah. Okay. Alright I believe all that stuff answered.. Thanks a lot..

Operator

And we will go next to Jeff Logsdon at Bank of Montreal

Jeff Logsdon - Banc of Montreal

Thank you. Michael or Richard, just to make sure I understand the economics on the 3D business. If you are going to charge $2 to $2.50 incrementally over your existing ticket prices and you are going to pay realty $0.50. Are you splitting with the studios before or after the payment to realty?

Michael Patrick

Before.

Jeff Logsdon - Banc of Montreal

Okay. So the margin on that business is going to be less, but we really look for dollars, not for margins. Is that your way to look at it?

Michael Patrick

Correct.

Jeff Logsdon - Banc of Montreal

Okay, secondly Richard maintenance CapEx for this year, what's that number going to come in at or around?

Richard Hare

Around, we have maintenance CapEx around $7 million, digital CapEx will be around $6 million and $12 million would be in new bills and for other improvements within the CapEx category. So that should get you to around $25 million.

Jeff Logsdon - Banc of Montreal

Are there expenses, that are not being capitalized, that are hitting your P&L now, for the digital or 3D rollouts?

Richard Hare

No, everything that, all the installation process where we went out we prepped the building and the facilities all that was capitalized and it was around, as we said $6 million this year and it was $4 million to $5 million last year. And that's a non-recurring on a going forward basis so we'll know that in 2008.

Jeff Logsdon - Banc of Montreal

And that's being amortized over the life of the contract?

Richard Hare

Yes, that's correct.

Jeff Logsdon - Banc of Montreal

Okay, great, thank you.

Operator

And Mr. Patrick, that does conclude our question-and-answer session. I'd like to turn it back to you for any closing comments, Sir.

Michael Patrick

We would like to thank you for coming to our call and we will look out to at the end of the fourth quarter. Thank you.

Operator

Thank you that does conclude the call. We do appreciate you participation at this time you may disconnect. Thank you

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