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Q3 2005 Regal Entertainment Group Earnings Conference Call

Oct 27 2005

Don De Laria - Regal Entertainment Group - VP of IR

Mike Campbell - Regal Entertainment Group - CEO

Amy Miles - Regal Entertainment Group - CFO

Michael Savner - Banc of America Securities - Analyst

Gordon Hodge - Thomas Weisel Partners - Analyst

Glen Reid - Bear Stearns - Analyst

Walter Winnitzki - - Analyst

Meredith Fisher - Jefferies & Company - Analyst

Matthew Harrigan - Janco Partners - Analyst

Robert Tracy - - Analyst

Dennis McAlpine - McAlpine & Associates - Analyst

Operator

At this time I would like to welcome everyone to the Regal Entertainment Group's third-quarter 2005 earnings release conference call. With our host 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) This call is being recorded. I would now like to turn the call over to Mr. Don De Laria, Vice President of Investor Relations. Please go ahead.

Don De Laria, Regal Entertainment Group - VP of IR

Hi, and good morning. Before we begin today I would like to remind our listeners that this conference call contains forward-looking statements within the meaning of section 27 of the securities act of 1933 as amended and section 21-E 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 March 15, 2005. All forward-looking statements are expressly qualified in their entirety by such factors.

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

Mike Campbell, Regal Entertainment Group - CEO

Thanks, Don, and welcome, and thank you all for dialing into our third-quarter conference call. Today I will provide an overview of the industry and Regal's third-quarter results and a review of current trends in the exhibition industry, including some of our expectations regarding box office trends for the holiday season. 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 briefly to third-quarter industry results, the industry box office saw successful openings and solid performances during the third quarter from several films including War of the Worlds which grossed $233 million, Wedding Crashers 207 million, Charlie and the Chocolate Factory at 205 million, Fantastic Four at 154 million and the four-year-old version of 106 million and finally, Dukes of Hazard at 80 million. And although the third quarter of 2005 included the strong performance of these films, the comparisons with the same quarter last year were difficult. The third quarter of 2004 included Spider-Man, which topped out at 374 million, The Bourne Supremacy at 176 million, I, Robot at 145, The Village at 115 million, Collateral at 101 million and the Princess Diaries at 95 million.

For the period that corresponds to Regal's third fiscal quarter EDI reported a domestic box office revenue decrease of approximately 5%. Other industry sources for the period that corresponds with Regal's fiscal third quarter showed declines in domestic box office revenues, ranging from 3.3% to 4.4%.

Now turning briefly to Regal's third-quarter results, due to the benefit of our accretive acquisition strategy, we again outperformed the industry topline results as we reported total box office revenues of approximately 416 million which represented a slight increase over the prior year. Also in a quarter of declining industry box office, Regal focused on what it can control, quick and again successful acquisition integrations and maintaining efficient operations.

During the quarter our extensive acquisition experience allowed the Company to quickly integrate the Eastern Federal Theatres, our average ticket per patron increased 4.2%, and our price increases has obviously benefited revenue line in a quarter of negative attendance comparisons.

We were also successful in increasing the average concession sale per patron by approximately 9.7% to $2.72. Earlier in the year we implemented changes in our concession combo programs and resized certain concession items. The combination of our initiatives and our concession program and to s lesser extent, concession friendly film product during the quarter contributed to very strong growth in our average concession per patron.

We also continued to focus on cost controls and we're pleased to report the following quarterly comparisons. We had a same screen decline in other operating expenses when combined with G&A expenses. We had a decline in film and advertising expense as a percentage of admissions revenue. And lastly, a favorable increase in our concession margins for the quarter. Our third-quarter results also include revenue of $26.7 million related to National CineMedia, which produced approximately $18.4 million of adjusted EBITDA and resulted in a 69% adjusted EBITDA margin. Now turning briefly to our outlook for the fourth fiscal quarter and the holiday box office. We began the fourth quarter this year with the Wallace & Gromit movie which has grossed todate about $45 million. Tomorrow we open the Legend of Zorro, Saw II and Weather Man. And next week Chicken Little, a CGI animated film from Disney pictures.

The fantasy family film, Zathura opens November 11th followed by one of the season's most anticipated films, Harry Potter and a Goblet of Fire which is the fourth film from Warner Bros. and the Harry Potter franchise. This film opens on November 18th. We are also expecting strong business from the Chronicles of Narnia, The Lion, the Witch and the Wardrobe, which opens December 9th, and King Kong opening on December 16th. Other films rounding out the holiday release schedule include Fun With Dick & Jane, which is a Columbia Pictures comedy starring Jim Carey and the producers, starring Matthew Broderick and Nathan Lane.

We continue to be optimistic about the holiday film slate in the Company's fiscal fourth quarter. While September finished up 11.3% versus last year, the October month to date box office through last Sunday was down 8.4%. However, it should be noted that in 2004 the industry witnessed its best October weekend ever with the release of Shark Tale and Ladder 49 on the same weekend. We continue to believe that the 2005 fourth-quarter comparisons with 2004 will be easier as the 2004 fourth quarter was down 6.8% from the same period in '03.

The real test of the film slate however will not come until late in the fourth quarter as the majority of the tentpole pictures have release dates in late November or December. We will provide more detail on our outlook for the 2006 film year on our next quarterly conference call. But at this point we are excited about such films that we see next year as Ice Age II, X-Men III, Over the Hedge, Mission Impossible III, the

Poseidon Adventure, the DaVinci Code, Pixar's Cars, Pirates of the Caribbean II, Superman Returns and the next film in the James Bond series, Casino Royale.

Now just for a few brief remarks on National CineMedia.

That is our joint venture with AMC and Cinemark. Earlier this year National CineMedia, which is the joint venture between Regal, AMC and Cinemark, was created to better leverage our advertising, marketing and distribution platform and to expand NCM's market coverage. This quarter Cinemark began installing equipment necessary to participate in this high margin opportunity. Once the deployment of the Cinemark network, which will include additional 2300 screens, is completed in April of 2006 the NCM network will cover over 150 markets including 49 of the top 50, reaching approximately 550 million annual fee attendees spread across 13,000 total screens, 11,000 of which are equipped digitally.

At the beginning of 2006 NCM will be launching a new preshow, titled First Look, which will retain many of the structural aspects of the previous Regal preshow program while creating a more exciting entertainment and marketing platform that features original content and ads that are made specifically for the Cinema or are premiered in theaters.

NCM continues to deliver the financial benefits that we expected from combining the distribution of three major circuits. NCM is well positioned to pursue incremental revenue and other EBITDA opportunities. The advertising outlook for the remainder of the year continues to be very favorable as NCM is expecting to exceed its internal targets for Q4. This momentum is continuing into 2006 with advertising commitments already received for 2006 in excess of 32% of the available inventory. We are confident that this growth will be further accelerated with the expansion of the NCM network, reach, and impression base in 2006 with the addition of Cinemark screens and the launch of a new first look preshow.

So in summary we're pleased to report another successful acquisition closing and subsequent integration. We are also pleased with the slight growth in revenues and adjusted EBITDA and what has been a very challenging industry box office environment. We are also excited about opportunities within National CineMedia and the upcoming holiday film slate. With that I would like to now turn over the presentation to Amy Miles, our CFO, to discuss overall third-quarter financial performance.

Amy Miles, Regal Entertainment Group - CFO

Thanks, Mike and good morning. Today I would like to provide additional detail on Regal's fiscal third-quarter results, provide an update with respect to our balance sheet and capital expenditures, as well as an update on the results of National CineMedia for the quarter.

We reported total revenues for the quarter of 628.4 million, consisting of 416.2 million from box office revenues, 164.7 million from concession revenues and just under 48 million of other operating revenues. Our total revenues increased this quarter approximately 2.8% over the prior comparable period, and that was primarily as a result of the acquisition, which resulted in a net increase of approximately 574 screens, and that more than offset a weak box office. And just for clarity, as a result of the timing of the acquisition this year and last year, all of our per screen comparisons we highlight today are based on average screen count for the quarter and exclude the 279 screens that were acquired from Signature on the last day of the fiscal Q3 2004 period.

Our admissions revenue this quarter increased approximately 1.4%, primarily as a result of the acquisition, coupled with an average ticket price increase of 4.2%, which more than offset an attendance per screen decline of 9.7%. We obviously outperformed the industry box office results due to the additional acquired screens. Our admission revenues on a same screen basis declined approximately 5.6% and approximated the range of industry results for the quarter.

Concession revenues this quarter increased 6.5% to 164.7 million. On a per screen basis concession revenues decreased 0.9% and on a per cap basis concession revenues increased 9.7. As Mike previously stated, we implemented changes in pricing and product mix of our Regal Combo program, as well as eliminated certain smaller size items from our concession product menu. These changes, coupled with the concession's friendly film mixture in the quarter produced the strong growth in the concession per cats.

Other revenues during the third fiscal quarter of '05 increased 2.6% over the comparable quarter of 2004 to 47.5 million. The increase in other revenues is related to increase in our vendor marketing programs. While NCM exceeded its internal revenue targets and grew advertising revenues over the prior third-quarter comparison, approximately 5.3 million of advertising revenues is recorded in our income statement on a net basis this quarter. I will provide additional information with respect to NCM revenues and operating results later in my remarks.

Looking briefly at some of the expense line items for the fiscal period, film and advertising as a percentage of box office for the current quarter represented 52.5% of admissions revenue. Film rental and advertising expense decreased by 70 points, 70 basis points, over the prior comparable quarter primarily as a result of the film product during the quarter and to a lesser extent of the softness in the overall industry box office environment.

Before our vendor marketing programs our concessions produced a gross margin of 85.4% this quarter, which represents an 80 basis point increase over the comparable quarter of 2004. We obviously benefited during the quarter from the strong growth in per caps. Total rent expense increased 7.3 million or 10% due primarily to the inclusion of the additional theaters and screens during the past year, and on a per screen basis rent increased approximately 2.6 compared to the same quarter of 2004.

Due to the accounting for the National CineMedia joint venture you need to combine other operating expenses with G&A to make sure you have consistency between the quarters. Once combined, other operating expenses and general and administrative expenses increased approximately 5.2% for the quarter, primarily as a result of the additional screens added during the year. On a per screen basis, the two line items together decreased 2.1%. The per screen decline was primarily due to a decline in controllable labor costs, somewhat offset by an increase in occupancy and utility costs for the quarter.

The third quarter produced adjusted EBITDA of 120.9 million, which was roughly 4 to 5 million better than the consensus estimates. Also we were pleased to report significant free cash flow in our quarterly results. A portion of the growth in the free cash flow is due to a decline in net CapEx, coupled with an improvement in working capital and this was due to certain of our bank principal and interest payment being front loaded in the fiscal year.

Adjusted diluted earnings per share totaled $0.13 for the quarter, and would have been in line with the consensus estimate had we not experienced the loss on disposal and impairment of operating assets of 7.6 million. Looking briefly at our balance sheet and asset base, we ended the quarter with 80.3 million in cash, and that was after we spent approximately 125 million in cash for the Eastern Federal acquisition and a total debt balance of just under 2 billion. Which resulted in a net debt to adjusted EBITDA ratio of approximately 3.7 times pro forma for the acquisition.

We were also successful in amending certain financial covenants in our bank facility during the third quarter to provide the Company additional financial flexibility over the next couple of years. Also with respect to our debt agreement during September we did enter into an interest rate swap for an additional 300 million of variable-rate debt and the term of that swap is 4 years. Our goal was to fix a higher percentage of our variable-rate debt at a time when the difference between the swap rate and the current variable-rate was minimal. After given effect to our new interest rate swap agreement approximately 75% of our debt is fixed and 25% is variable.

Looking briefly at our CapEx, our capital expenditures during the quarter totaled 28 million. And during the quarter we also recorded proceeds from asset sales of approximately 19.6. And as such, the net CapEx was 8.4 million. During the third fiscal quarter of '05 we opened one theater with 16 screens. We acquired 21 theaters with 230 screens, and we closed 12 theaters with 84 screens, bringing our totals to 568 theaters and 6,537 screens. As we continue to aggressively monitor our asset base, we plan on closing an additional 20 theaters with 150 screens in the fourth quarter, and that includes the recently announced sale of five United Artists Theatres with 37 screens. And these closures should be offset by expected openings of four theaters with 64 screens. We now expect our full year CapEx to total approximately 130 to 140 million, of which 35 to 45 million will be funded by asset sales.

Now with respect to the financial highlights for National CineMedia for the quarter, calendar third quarter represents the second quarter of operations for National CineMedia or NCM. While Cinemark has joined NCM as a founding member during the third Q, they are currently working on installing the digital network and as such will not have any significant impact on NCM's results until the second quarter of 2006. During the remainder of the '05 period, Regal will continue to receive distributions of approximately 63% of National CineMedia EBITDA with AMC receiving the remaining 37.

Total revenues related to Regal Entertainment portion of the NCM and other advertising contracts were 26.7 million for the quarter, third quarter, of which 26.4 million is included in other revenues, and the balance is included in our admissions revenue. And just to clarify, as previously mentioned a portion of the third quarter NCM revenue has not been recorded on a consistent basis with that of the Q3 of 2004 as approximately 5.3 million of advertising revenues have been recorded on a net versus a gross basis.

During the fourth quarter of '05 an even larger percentage of the advertising revenues will be recorded on a net basis. And as we have previously disclosed, substantially all of the NCM revenues will be met in our 2006 financial statement. The NCM advertising revenues, once you adjust for the accounting differences between the gross and the net, grew approximately 10% quarter-over-quarter. Due primarily to the incremental screens supplementing the revenue growth, increased utilization due primarily to the incremental 30- second advertising spot added to the program at the beginning of the fiscal year and CPM growth of approximately 1%.

Total adjusted EBITDA related to our National CineMedia investment, and we adjusted for certain intercompany costs, totaled 18.4 million compared to 16.3 million for the same period last year. So this 10% growth in revenue produced a 12% growth in adjusted EBITDA and our margins obviously remain very high and continue to include the benefits of synergy associated with a larger network.

As Mike previously stated, we remain excited about the NCM business and the free cash flow it contributes to Regal. We continue to believe that the NCM has solid growth potential, and when coupled with the high margin characteristics, NCM should continue to provide free cash flow growth for Regal and its shareholders. In closing, we were pleased to report growth in revenues and adjusted EBITDA ahead of consensus and in a period of declining national box revenues. We're pleased with the integration of the Eastern Federal acquisition and to again return value to our shareholders with our $0.30 dividend. We also look forward to continued growth from our NCM investment as well as a solid 2006 film plate.

This concludes our remarks for this morning, and we will now open the line for any questions you may have.

(OPERATOR INSTRUCTIONS)

Michael Savner, Banc of America Securities.

Michael Savner, Banc of America Securities - Analyst

Two quick questions. First, one on the pricing increases, they seem to have been very strong over the first nine months of the year and maybe part of that benefits from the film mix. But it is certainly counterintuitive to the view of some people that the theater business is on the long road to decline here. So Mike, can you talk a little about your pricing strategy going forward? Can you continue to push through increases at these similar levels or would you consider moderating increases to maybe spur attendance growth? That is the first question.

Second, on your announcement in the last couple of weeks about REAL D digital cinema and the rollout you're doing right now maybe you can talk a little about the costs associated with that, the strategy and kind of how you are going to measure, how viable that is going to be in terms of rolling out additional screens and theaters. Thank you.

Mike Campbell, Regal Entertainment Group - CEO

Thanks, Mike. Regarding pricing, we have long maintained that the 3 to 4% in average ticket price in the U.S. over a period of time is sustainable. And in the field we get very little pushback on the price increases that we've putting through over the years. You may hear different things in the press because anytime there is a downturn in the box office I think people out there sifting through everything and anything that could be a potential factor. But we believe that the historical increases in ticket prices are sustainable. Concession is a little bit different. I think there is a little more pushback in concession. But if you look at what has happened this year most of that increase has not come as a result of price increases. It has come as a result of changing sizes and product mix, as well as elimination of certain items that we sell. We've been very pleased with the results there; we've done that with a minimal amount of price increases, and we've actually improved our margins during that process.

As far as the REAL D is concerned, we've seen the technology. It does require a digital projector to do that. Those projectors are being installed in our theaters at no cost to us. Clearly we have some capital investment, minimal investment in the 3-D servers themselves, but we are anxious to see the results in the marketplace with the release of Chicken Little. (technical difficulty) technology is great, we've seen it, and we're rolling out 17 of these units across the country out of a total that we hear is around 85 units. So that is dead on 20% of the total. And here again it is an experiment, but we believe that it is something that if it works and people respond to it the way we did when we saw it over time it could increase attendance. It's an enhanced experience in the theater, and it is also an experience that I do believe that people would be willing to pay a bit of a premium for once they see it.

Michael Savner, Banc of America Securities - Analyst

Thanks very much, Mike.

Operator

Gordon Hodge, Thomas Weisel Partners.

Gordon Hodge, Thomas Weisel Partners - Analyst

You had a $7.6 million charge. I assumed that related to the theater in Biloxi, but if you could maybe clarify that. And then on the National CineMedia business, I think you were going to book revenues -- maybe this is what you were talking about in 2006, just your share of the EBITDA in your revenue line. I wasn't quite clear on the 5.3 million net and the difference between gross and net. Is that net of agents, ad agency costs, or is that the difference between the EBITDA and the revenue recognition?

Amy Miles, Regal Entertainment Group - CFO

Let me take your first question with respect to National CineMedia. Remember, we maintained all of our contracts here at Regal when the venture was formed. So that is why you see the gross accounting in our financial statements. We record the revenue and expenses associated with servicing all those contracts. As we are getting closer to the '06 period, and to your point, what you will see in our financials going forward is essentially our portion of NCM's revenue, our EBITDA -- I am sorry -- in our other revenue line. And that is net of all expenses. That will be the fee that that they pay us to use the theaters. But what you saw in third quarter was about 5.3 million of the revenue, was contracts by NCM on Regal Entertainment Group's behalf. So as we are migrating closer to the '06 period all of our unsold inventory will be contracts generated by National CineMedia. It is migrating to that net presentation. The difference this quarter had the 5.3 been gross instead of net, we would have had an incremental 2.6 or roughly of revenue and about 2.6 million more of costs, because once you get to the EBITDA line it evens out.

Gordon Hodge, Thomas Weisel Partners - Analyst

And is the 26.7, is that just Regal's?

Amy Miles, Regal Entertainment Group - CFO

Yes, it sure is.

Gordon Hodge, Thomas Weisel Partners - Analyst

Just Regal's piece, so you actually did more?

Amy Miles, Regal Entertainment Group - CFO

So when you think about our EBITDA of 18.4 million you can gross that up by 63%, and there is a couple of costs that we still charge to those revenues related to certain assets that we maintain here, that you get within about one million or so dollars of NCM's EBITDA for the quarter.

Gordon Hodge, Thomas Weisel Partners - Analyst

Great. And then on the charge?

Amy Miles, Regal Entertainment Group - CFO

With respect to -- it wasn't the Biloxi Theatre. We had an impairment charge this quarter that is included in there, and that was about 6 million. And what you see there is just if you have seen some negative box office trends, certain of the marginal theaters are more suspect for impairment charges and again, that is non-cash. And then the balance of that was just related to -- as we continue to generate asset sales and close some of the theaters.

Gordon Hodge, Thomas Weisel Partners - Analyst

Great. Thank you.

Operator

Glen Reid, Bear Stearns.

Glen Reid, Bear Stearns - Analyst

First the acquisition environment, would love to get your thoughts on sort of whether or not valuations are looking attractive or if there is any sort of change in the landscape from your point of view. Secondly, on CPM's for CineMedia, you mentioned they were up about 1%. I wondered if you could actually tell us what the average CPM was in the quarter and sort of what you think the growth rate might be there, sort of long-term. Thanks.

Mike Campbell, Regal Entertainment Group - CEO

I will take the acquisition question. We did complete the Eastern Federal transaction in the third quarter. As we said before, we continue to have dialogue on a constant basis with potential sellers. But I think in this particular environment it is a little bit difficult sometimes to bring buyers and sellers together, because if you are selling assets in a year cyclical business when admissions are down, as a seller you believe you may be leaving money on the table. And then contrarily as a buyer, in that same environment you believe that you might be overpaying a bit. So I think in this environment it is a little bit tougher to get these dialogue going. But we have a long history of acquisition and we're going to continue focusing on acquiring good assets at reasonable prices.

Amy Miles, Regal Entertainment Group - CFO

When you're thinking about the NCM CPM growth for the quarter, I think the best way to think about it is on -- you saw less of an increase this quarter at 1%, and that was primarily due to the fact that there is a lot of incremental inventory in NCM today as you expand to AMC and as you continue to expand to Cinemark. So we at National CineMedia's goal will be to continue to maximize inventory utilization, create scarcity and once that scarcity is created, to continue -- that should create an environment where you will have favorable CPM growth. So we continue to believe that that is going to happen over the long-term, and you're going to see a premium in that marketplace. And that part as you continue to see is being benefit where traditional advertising is migrating to cinema advertising. And so over the long-term we continue to believe that Regal CineMedia will produce the growth that is expected. And it is also important to note I think during the second quarter and third quarter of our fiscal year, which were periods where attendance was down, NCM generated substantial revenue growth during both of those periods.

Glen Reid, Bear Stearns - Analyst

That's helpful. Again, just a little bit of follow-up on the

CPM. I know Kurt Hall in the past has said something in the low 30s is roughly where you had been. I mean, can we expect that to sort of move up into the high 30s, into the '40s, if you could maybe give us some sort of relative perspective.

Amy Miles, Regal Entertainment Group - CFO

I think you will continue to see increases and over what time period, that takes to grow from the low 30s to the 40s I think that remains to be seen. But we are confident that once you create the scarcity in inventory and the long-term dynamics with respect to this type of medium are very favorable. So to give you some timeframe I think its harder to do today, but we continue to believe that is going to happen.

Glen Reid, Bear Stearns - Analyst

Okay, great. Thanks.

Operator

Walter Winnitzki with (indiscernible) Capital.

Walter Winnitzki, - Analyst

I wanted to follow-up on an earlier question. There seems to be a lot of discussion in the press of these days about digital cinema and a fair amount even from the folks at NATO. Two questions; maybe you can share with us your thoughts on where we are with the technology and how important it is to you. And second is is National CineMedia in any way a part of digital cinema in your eyes or not?

Mike Campbell, Regal Entertainment Group - CEO

Regarding the state of digital cinema, I mean clearly there has been a lot of progress made over the last couple of years and certainly the last few months. The technical standards have been established through the studio DCI consortium. There are manufacturers out there now that are prepared to manufacture to this consistent DCI standard. We have seen a number of third party financing plans out there, which all envision the studios providing the bulk of the capital necessary for the rollout through the payment of virtual print fees, which would approximate the cost of an existing film print. So I believe that is moving forward.

We are continuing to look at the different options, and we continue to be cautious in this respect. We believe that the digital systems that are available out there today that are 2K resolution are arguably as good as film. However, there is another technology that is advancing very quickly, which is a 4K or 4000 lines of resolution technology, which is by Sony and others. And we have seen demonstrations of that. It is clearly superior in virtually all respects to something of lower resolution. And I think for us and the industry one of the questions is when do you begin the rollout, and with what technology, and that is what we are continuing to sort through. But the good news is, in my opinion the technical standards are established and I think there is a business model in place out there that will work for exhibitors.

Walter Winnitzki, - Analyst

Second part of that?

Mike Campbell, Regal Entertainment Group - CEO

And your CineMedia question?

Walter Winnitzki, - Analyst

Does National CineMedia have a role in the rollout of digital cinema in your eyes?

Mike Campbell, Regal Entertainment Group - CEO

I think clearly they could be a factor. And certainly if we used the National CineMedia, even though we own the distribution network today, it was certainly built by the predecessor to National CineMedia. And it is a potential delivery system for digital cinema. So certainly there would be some collaboration between NCM and its member companies, particularly if we end up distributing digital films through the satellite network.

Operator

Meredith Fisher with Jefferies & Company.

Meredith Fisher, Jefferies & Company - Analyst

Just wondering if you can provide us with some early expectations for CapEx in '06? And then again just if you can reiterate again your comfort level in terms of leverage as you start to look into '06, if you still are maintaining that sort of comfort level to bump up maybe another 0.5 or so on the ratio.

Amy Miles, Regal Entertainment Group - CFO

We've said before you can think about kind of a run rate

CapEx number for the company. But anywhere between 135, 150-ish. So I would expect that as we are finalizing our budget for '06 that the CapEx is going to come right in that range. And with respect to leverage, the leverage is obviously a little bit higher this quarter as it was last quarter, primarily due to your (indiscernible) environment where box office attendance is down. As that rebounds that would and EBITDA grows that will improve our leverage and yes, we would still be comfortable. We're not at a ceiling by any means with respect to our leverage ratio.

Meredith Fisher, Jefferies & Company - Analyst

Okay, great. Thanks very much.

Operator

Matthew Harrigan, Janco Partners.

Matthew Harrigan, Janco Partners - Analyst

Can you comment on the further projects that are in the Q for the REAL D format? Given I think Disney and Sony both mentioned that they had projects for next year. And could you comment on the quality of the 3-D resolution relative to what was in Polar Express and how heavily are you planning to accentuate the 3-D element in those areas where you have that capability? On the marketing side?

Mike Campbell, Regal Entertainment Group - CEO

I don't have the specific film titles with me, but my understanding is there are another four or five films among several distributors that will be available at a minimum for this REAL D system. And as I said before, and I just want to reiterate again this is an experiment and the capital cost of doing what we've done so far as a company and the balance of the industry has been fairly minimal. We want to see the results. The comparisons I think to Polar Express I think are favorable. That was presented in an IMAX format, and the IMAX has a great technology and that was a great looking film. But REAL D is a slightly different technology, and I think its at least as good as what I have seen with the Polar Express 3-D in the past. What is particularly intriguing about the REAL D system is that for relatively modest costs or certainly an affordable cost, virtually any film can be converted into a 3-D format. It is not limited to any specific film, and we've seen footage on older films, newer films, animated films that have all been converted to 3-D in this process. And that has been quite spectacular at this point in time. So the intriguing part is if this technology does appeal to the public and catches on with the rollout of digital cinema overall, I think you could certainly see hundreds or even thousands of 3-D equipped screens across the country as part of this rollout over time, which gives the studios a much broader platform to rollout this type of product.

Matthew Harrigan, Janco Partners - Analyst

Does that particular company have a leg in the home as well as the home theater advances or is that going to be strictly a cinema technology over the next five years or so by your understanding?

Mike Campbell, Regal Entertainment Group - CEO

I think it is strictly a cinema technology; I think at this point in time it would be almost impossible to duplicate it within the home. And particularly with the type of systems that are necessary to produce the 3-D image. So I think this is a thing that the -- will be strictly cinema for the foreseeable future if not long-term. And I think it could create some new excitement in our marketplace.

Matthew Harrigan, Janco Partners - Analyst

So we can all go to the premiere of the Wizard of Oz?

Mike Campbell, Regal Entertainment Group - CEO

Could be; that could easily be converted to a 3-D format based on what I've seen, and it does give you a whole new appreciation of the film.

Matthew Harrigan, Janco Partners - Analyst

Great. Thank you.

Operator

(indiscernible) with AJB (ph) Capital.

Unidentified Speaker

I have two questions. One, just financial. When you consider acquisitions, do you adjust the reported cash flows to average out amortization for refurbishing of the auditoriums over time? So that you actually pay for an averaged out cash flow? And secondly, with respect to the National CineMedia have you actually tested audience response to this? I've been in one theater where I saw an entire audience stand up and face away from the screen while being forced to watch these commercials. And I'm wondering if while you're adding revenue and hopefully EBITDA at that line you're not losing it ultimately at the top line by reducing people's willingness to come to the theater.

Amy Miles, Regal Entertainment Group - CFO

With respect to your first question on acquisitions, when we are talking about -- we pay X dollars and X multiple, that disclosure is typically a trailing multiple, and it is not adjusted for CapEx. When the -- because typically the CapEx that you are seeing in the theaters that we are buying would be maintenance type CapEx, it is not deferred purchase price. The last two asset acquisitions were new theaters that were over 85% stadium. But when the company evaluates its internal target what IRR do we expect from this asset acquisition and we are looking forward five to seven years with cash flows that are expected, that is adjusted by maintenance CapEx. When we figure out what return we are going to generate. And so far those have been in excess of 20% each time we've executed an asset acquisition.

Mike Campbell, Regal Entertainment Group - CEO

Regarding the advertising question, we take very seriously as a Company our patrons point of view. And we have online surveys, comment cards as well as in theater comment cards and statistically less than 1% of our comments that come in, and certainly negative comments about the experience have anything to do with advertising at all. So we get very, very little negative feedback there. Also, advertising -- people are seeming -- some people are seeming to view this as something new and novel. It's been around for many years. Theater advertising has been around for as long as I can remember. I think what we are doing today though is doing it in a better form, it is more entertaining. And Regal is somewhat different even within that particular group. And that is that we do not show advertising after our advertised start of show time. And one of the reasons we don't do that is because of our digital network and the technology that we have. Our program starts approximately 20 minutes before advertised show time. And the only thing that you see after the advertised show time with our circuit is movie previews, which is part of the movie experience and then the feature film. And a lot of the negative reaction in the marketplace over the last year or two regarding advertising in general I think had been related to patrons who believe that they are forced to view advertising after the announced show time, sometimes running 5, 6, 7 minutes. And many of the theaters that do that do not have digital networks in order to separate their 35mm presentations from digital presentations.

Operator

Robert Tracy (indiscernible).

Robert Tracy, - Analyst

I noticed your book value keeps coming down. Could you comment a little bit about how do the credit rating agencies kind of look at that type, the leverage in that metric? And could you talk a little bit about in terms of what are you hearing from the credit providers in terms of book value?

Amy Miles, Regal Entertainment Group - CFO

Reality is with respect to book value, I have not had a conversation and we stay in constant contact with the rating agencies just because we thought that is a very important relationship. And I have not had a conversation with respect to book value with either the rating agencies nor our credit providers. And a lot of -- you can see with respect to maybe how they are considering the business is if we continue to have depreciation each year that obviously lowers the book value and also our continued asset closure programs.

Robert Tracy, - Analyst

Could you talk a little bit about what is your debt capacity like? And kind of related to that, have you given any thoughts about another special dividend?

Amy Miles, Regal Entertainment Group - CFO

With respect to our debt capacity, what we've said before is the Company's target leverage is often right at that -- right around the 3.5 times, that is net debt to EBITDA, we are slightly over that today. Going forward for various opportunities would we consider an increase in leverage over half a turn or so -- acquisition, special dividend, whatever that opportunity may be. As long as we felt like we could quickly repay or grow EBITDA to delever those would all be various opportunities that we would consider at various points in time.

Robert Tracy, - Analyst

Are the credit providers comfortable with you bumping that ratio?

Amy Miles, Regal Entertainment Group - CFO

At this point in time I have no reason to believe that we have issues with respect to the rating agencies and/or the debt providers with our various ratios.

Operator

Dennis McAlpine, McAlpine Associates.

Dennis McAlpine, McAlpine & Associates - Analyst

To follow on this REAL D situation as they put in those 17 units, does that conflict with what you're doing with NCM? And if you went let's say with the Christie system or some other regular digital system, does that necessitate the replacement of NCM or can NCM use the equipment that can go into that sort of a scenario?

Mike Campbell, Regal Entertainment Group - CEO

It is all compatible, Dennis. And going forward NCM we already have the small projectors in use. And we have the option going forward to either maintain the existence of those smaller projectors or to transfer anything that we are running through those projectors into larger digital projectors. One of the things just as a side item, one of the things to consider would be just the power usage and the bulb cost for the larger projectors. We may decide at some point in the future to continue using the NCM smaller projectors for advertising just as a cost savings mechanism. But we have the flexibility and the ability to do both.

Dennis McAlpine, McAlpine & Associates - Analyst

And as you put in the units with the REAL D, what does that do to your desire or willingness to put in IMAX systems?

Mike Campbell, Regal Entertainment Group - CEO

I think we are still the largest Operator of IMAX units across the country; we have 13 or 14 of those units. And we haven't chosen to put any more units in the last couple of years. We're happy where we are today. But we're going to let this play out and see where it ends up. But IMAX bottom line is still a very expensive rollout proposition for us. It requires a lot of capital to do that. And we're just comfortable where we are today.

Operator

We have reached our allotted of time for questions. I want to now turn the conference back over to Mr. Mike Campbell for any closing or additional remarks.

Mike Campbell, Regal Entertainment Group - CEO

We appreciate everybody calling in and look forward to talking to you again after the first of the year regarding what we hope to be a good fourth quarter. Thanks a lot.

Operator

That does conclude our conference call. Thank you for joining us today.

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Source: Regal Entertainment Group Q3 2005 Earnings Conference Call Transcript (RGC)
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