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Regal Entertainment Group (NYSE:RGC)

Q4 2007 Earnings Call

February 7, 2008 9:30 am ET

Executives

Donald De Laria - VP IR

Michael L. Campbell - Chairman, CEO

Amy E. Miles - CFO, EVP, Treasurer

Analysts

Eric Handler - Lehman Brothers

Lloyd Walmsley - Thomas Weisel Partners

Michael Savner - Banc of America Securities

Barton Crockett - J.P. Morgan Securities

David Miller - SMH Capital

Matthew Harrigan - Ferris, Baker Watts

Drew E. Crum - Stifel Nicolaus

Hunter R. DuBose - Morgan Stanley

Operator

Greetings, ladies and gentlemen, and welcome to the Regal Entertainment Group fourth quarter 2007 earnings conference call. (Operator Instructions)

It is now my pleasure to introduce your host, Mr. Don De Laria. Thank you, Mr. De Laria, you may now begin.

Donald De Laria - VP IR

Hi, and good morning.

Before I begin today, I'd like to remind our listeners that this conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended.

All statements other than statements of historical facts communicated during this conference call may constituent forward-looking statements. These forward-looking statements involve risks and uncertainties. Important factors that can cause actual results to differ materially from the company's expectations are disclosed in the Risk Factors contained in the company's annual report on Form 10-K dated February 26, 2007. All forward-looking statements are expressly qualified in their entirety by such factors.

And I'll turn the call over to Michael Campbell.

Michael L. Campbell - Chairman, CEO

Thanks, Don, and welcome and thank you for dialling into the fourth quarter and year end conference call.

Today I will provide an overview of the industry's and Regal's fourth quarter results, a brief recap of the 2007 fiscal year, and review of current trends in the exhibition industry, including some of our expectations regarding box office trends for the remainder of the first quarter and the summer 2008 film slate overall as well.

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

Now turning to fourth quarter industry results, for the period that corresponds to Regal's fourth fiscal quarter, various industry sources report that box office revenue decreased approximately 4.6%, primarily as a result of lack of depth in the film slate beyond the top ten films. According to Box Office Mojo, box office receipts generated by the top ten films of the fourth quarter were essentially flat with last year, the films 11 through 25 grossed approximately 8% less than last year, and films below the top 25 grossed approximately 9% less than the comparable films in 2006.

When we combine our industry estimates of screen growth of 1.5% to 2% with a 4.6% decrease in box office revenues, we can assume a per-screen decline in industry box office of approximately 6% to 6.5%. So on a per-screen basis, Regal's reported box office results were roughly in line with the overall industry results for the quarter.

Now turning briefly to Regal's fourth quarter results, although fiscal 2007 was a solid year for the industry overall, the fourth quarter clearly underperformed relative to both our own and the industry's expectations.

In the absence of solid box office results, however, Regal focuses on what it can control, which is maintaining efficient operations and maximizing free cash flow.

During the quarter, our average ticket price increased 5.9%, our concession per caps increased 4.2%. We also reported a 40 basis point reduction in film rental and advertising expenses, as well as a 50 basis point improvement in our concession margins.

On a per-screen basis, other operating expenses combined with G&A expenses were down when compared to the same period last year, and lastly, we reported free cash flow for the quarter of approximately $104 million, which was down only slightly from the same quarter last year in spite of the weaker top line results.

Now, focusing on the 2007 industry results, fiscal 2007 set a new record for industry box office receipts, the box office revenues increasing approximately 4.8 percent over fiscal 2006, which was also a growth year at the box office.

The box office results were driven by strong performances of films late in the first quarter and in the third quarter, with ticket price increases generating the yearover-year growth.

The success of the 2007 box office was generated by the key [inaudible] pictures overall, as the industry set many records in terms of top five and top ten grossing films during the May through Labor Day weekend period. The record fiscal 2007 box office results were achieved absent depth in the film slate, as the top 25 films accounted for approximately 48% of the 2007 industry box office receipts compared to only 40% in 2006.

While the final industry numbers are not yet available, we expect that industry attendance for 2007 was essentially flat with the prior year.

Now with regard to Regal's fiscal 2007 results, Regal's reported growth in box office and concession revenues resulted in adjusted EBITDA of approximately $531 million, which is at the high end of the range for the company's 2007 adjusted EBITDA guidance.

Regal, along with our exhibition partners, generated incremental value for our shareholders with the successful initial public offering of National CineMedia early in our 2007 fiscal year. We continue to believe our investment in National CineMedia will provide additional value for our investors going forward.

Also in 2007 we were pleased to reward our shareholders with $3.20 per share in dividends, including a $2.00 extraordinary dividend funded from the proceeds received from the National CineMedia initial public offering. Including the dividend announced today, we have generated dividends of $17.56 since our initial public offering, which was priced at $19.00 in May of 2002.

We also continue to embrace new technologies in 2007, including expanding our digital 3-D rollout to include a total of 134 screens, pursuing additional IMAX locations as we continue to focus on offering a premium experience for our customers, and lastly, opening our first all-digital projection theater during the fourth quarter of 2007.

And finally, early in 2008 we announced an agreement to acquire Consolidated Theaters, which is a modern, high-quality circuit with 28 theaters and 400 screens.

Now turning briefly to our outlook for the balance of the first quarter, during the first five-and-a-half weeks of the first quarter this year, the industry box office has increased approximately 21% versus the prior comparable period in 2007.

In February, we're particularly enthusiastic about the prospects for films including The Spiderwick Chronicles, Fool's Gold, and Jumper, and then in March key films will include Horton Here's a Who, Superhero Movie, Semi-Pro, 21, 10000 BC and Drillbit Taylor.

While the quarter is off to an excellent start, we do expect more challenging comparisons beginning in early March, when we will be comparing against the movie 300, which grossed $168 million of its eventual $210 million in Regal's first quarter last year.

Now looking briefly at opportunities for 2008, the film slate, we're optimistic that the industry will achieve another year of positive top line growth driven by ticket price increases in line with historical averages.

While we are always glad to see high-profile franchise titles such as last summer's Spiderman III, Shrek the Third, and Pirates of the Caribbean: At World's End, in the film line up it's important to note that depth, spacing and counterprogramming are key ingredients to overall success at the box office.

In May of last year, three of the most successful franchise films in history were all released in a condensed three-week period. However, there was little if any counterprogramming released in the weeks immediately before or after the runs of these franchise titles. So as a result, the box office was actually down 4.9% during the five-week period immediately preceding the opening of Spiderman III last year, and down 8.4% in the four-week period following the opening of Pirates III last year.

During this time of unprecedented release of franchise films, the calendar Q2 box office rose only 1.8% and only 1.2% on Regal's fiscal Q2 basis.

So we're a little bit happier going forward this year, optimistic looking at additional original programming in the film slate, and we're pleased that the [2000] film slate also includes a number of franchise film titles that are spaced more evenly throughout the year.

On May 16, going forward, we have Chronicles of Narnia: Prince Caspian; on May 22, Indiana Jones and the Kingdom of the Crystal Skull; on June 6, the next Dreamworks' animated film, Kung Fu Panda; June 13, The Incredible Hulk from Universal; on June 27, Pixar/Disney's next film, WallE; July 2, Hancock, starring Will Smith, July 18, The Dark Knight, which is the next instalment of the new Batman franchise, November 7, the Madagascar sequel, and Quantum of Solace, which is the next James Bond film, and then in November we have Harry Potter and the Half-Blood Prince.

Now turning briefly to the acquisition environment, on January 15 Regal announced an agreement to acquire Consolidated Theaters, a modern circuit with theaters in Georgia, Maryland, North and South Carolina, Tennessee and Virginia, for approximately $210 million in cash.

Consolidated Theaters has been a key target for Regal due primarily to the modern, high-quality asset base. The Consolidated Theaters are 95% stadium, and approximately 80% of the assets were built in the last six years. This new, high-quality asset base has allowed Consolidated to consistently outperform industry box office results.

In fiscal 2007, Consolidated's box office revenues grew by approximately 20% and have continued to outpace the industry's growth in 2008 as Consolidated's box office revenues are up 27% year-to-date.

Acquisitions, as you know, have historically been a key component of our business growth strategy, and we were pleased to announce this accretive transaction.

Now turning to the digital cinema initiative, through DCIP Regal is continuing to finalize the details of a financing plan that would provide for a studio-financed conversion to digital projection. Over the past year we have finalized a number of details and hope to complete the process and secure the independent financing that will allow us and our partners in DCIP to begin the rollout of digital projection equipment during the second half of 2008.

We remain optimistic regarding the benefits of digital cinema, primarily as it relates to future growth potential associated with 3-D film product and other 3D content. We're also pleased to see continued support of 3-D film product by the major studies as the 2009 and 2010 announced 3-D film slate continues to expand.

In summary, we're pleased with our 2007 financial results and look forward to continued box office success and to bringing an expanded rollout of new technologies to market during 2008.

I'd like to now turn over the presentation to Amy Miles, our CFO, to discuss the company's financial performance.

Amy E. Miles - CFO, EVP, Treasurer

Thank you, Mike, and good morning.

Today I'd like to provide additional detail on Regal's fiscal fourth quarter results and asset base with respect to our balance sheet and capital expenditures, as well as provide guidance with respect to the financial impact of our fiscal 53rd week on our 2008 results.

The company reported total revenues of $599 million, consisting of $404.1 million from box office revenues, $158.4 million from concessions, and $37.4 million of other operating revenues.

The reported 6.5% decrease in box office revenues consists of a 5.9% increase in the average ticket price per person offset by an 11.6% decline in attendance.

The concession revenues also reflected a 4.2% increase in concession per cap, again offset by the decline in attendance.

The decrease in other revenues is related to our modified exhibitor services agreement with National CineMedia and was somewhat offset by increases in vendor marketing programs and other theater revenues for the quarter.

Looking briefly at the expense line items for the fiscal period, film and advertising expense represented 51.4% of admission revenue, which is a decrease of 40 basis points over the prior comparable quarter, and that's primarily as a result of decreased advertising costs.

We were also pleased to report that concession margins - and that's before factoring in our vendor marketing programs - increased 50 basis points over the comparable period of 2006 and totalled 86.4%.

Total rent expense increased $1.2 million or 1.4% due to normal inflationary increases and newer - which are much productive - screens, replacing our older, less-productive screens.

Other operating expense decreased approximately $0.9 million or 0.5% for the quarter, primarily as a result of a decline in certain of our variable cost line items associated with the decline in attendance.

The fourth quarter produced adjusted EBITDA of just under $113 million versus $138.9 million for the same quarter last year and resulted in an adjusted EBITDA margin of 18.8%. As a reminder, the $112.7 million of adjusted EBITDA included a contribution from National CineMedia of approximately $11.3 million this quarter compared to a contribution of approximately $22.1 million in the fourth fiscal quarter of 2006.

Regal's reported adjusted diluted earnings per share of $0.15 for the quarter exceeded the Bloomberg and First Call mean estimate by $0.03 and the Multex estimate by $0.02.

Briefly, with respect to the 2007 fiscal year, as Mike previously stated, we were pleased to report another year of solid company and industry box office results. The adjusted EBITDA for the 2007 fiscal year totalled approximately $531.3 million versus the $535.4 million for the 2006 fiscal year. Clearly, the year met our expectations as we reported adjusted EBITDA at the high end of our 2007 guidance.

It's also important to know that the adjusted EBITDA was achieved with $39.5 million less EBITDA contributed by National CineMedia, again due to our modified exhibitor services agreement.

Looking briefly at our balance sheet and asset base, we ended the quarter with just over $435 million in cash and total debt balance of just under $2 billion. The $435 million will be the source of funding for the pending Consolidated Theaters acquisition and pro forma for the acquisition Regal's cash on hand would total $225 million.

Our pro forma leverage remains conservative as compared to our peers, and that continues to provide us financial flexibility and does support our focus on returning value to shareholders.

Also with respect to our capital structure, we did disclose in our Form 10-K - I'm sorry, our Form 8-K - filed this morning that we may acquire up to $50 million  and that is face value - of our convertible securities in advance of their maturity. The converts mature on May 15, 2008, and at this time it is our intent to ultimately refinance the $123.7 million of outstanding converts with debt.

Turning briefly to Capex, Capex during the fourth quarter totalled $32.4 million. During the quarter, the company recorded proceeds from asset sales of approximately $8.7 million and as such, the net Capex was $23.7.

During the fourth fiscal quarter of 2007, we opened three theaters with 46 screens and closed two theaters with 13 screens, bringing our totals to 527 theaters with 6,388 screens.

Based on our development schedule for 2008, we expect full-year Capex to be in the range of $115 to $130 million, inclusive of $5 to $10 million of asset sales. We would expect capital expenditures to be slightly weighted to the second half of the year.

For 2008 we expect to open six to eight theaters with 90 to 110 screens and close seven to 10 theaters with 70 to 90 screens. In addition, our pending acquisition of Consolidated Theaters is expected to add 28 theaters and 400 screens, which would result in an ending theater count of approximately 554 and an ending screen count for fiscal 2008 of approximately 6,808 screens.

Turning briefly to the Consolidated acquisition, as Mike previously stated, we were pleased to announce the pending Consolidated Theaters deal. Consolidated has been successful in building a high-quality asset base, and we look forward to a closing integration later this year.

With respect to a few financial highlights, the transaction value is $210 and will be funded with cash on the company's balance sheet. Our pre-synergy multiple on a pro forma basis is approximately 7.6 times, and with the benefit of our [NCM] structure, we expect a post-synergy multiple of just under 6 times EBITDA. As previously stated, the deal is accretive to our shareholders and we believe a very prudent use of cash on our balance sheet.

As we look forward to fiscal 2008, I want to remind everyone that Regal's fiscal fourth quarter of '08 will contain 14 weeks compared to Regal's fiscal fourth quarter of 2007, which contained 13 weeks. Accordingly, our fiscal 2008 will include 53 weeks as compared to 52 weeks for fiscal 2007.

The extra week in the fourth fiscal quarter and fiscal year is significant in that it occurs between Christmas and New Years, which is historically a high-traffic week for the industry. When this same calendar cut off occurred in 2003, the extra week increased our attendance by 10.2 million and generated approximately $40 million of incremental EBITDA. We would expect a similar benefit of $40 to $45 million in the 2008 fiscal year.

In addition to the 53rd week, 2008 will also include a full year of equity distribution for National CineMedia versus the partial payment we received in 2007. The fiscal 2008 results will also include the initial tax receivable payment from National CineMedia, which is expected to be approximately $6 million.

Regarding the company's expectations for fiscal 2008, again, include the benefit of the 53rd week, you include a full year of distribution from National CineMedia, including the tax receivable payment, and you assume that we're able to close Consolidated at the end of the second quarter, we would be comfortable at the high end of the current analyst consensus of $575 million to $595 million of adjusted EBITDA for the 2008 fiscal year.

In closing, we were pleased with our 2007 fiscal year results and look forward to continued success in 2008.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Thank you. Our first question is coming from comes from Eric Handler of Lehman Brothers.

Eric Handler - Lehman Brothers

Good morning. Two questions for you guys. As I understand it, Consolidated Theaters recently re-upped with Screenvision and that contract probably isn't due until 2010. Do you guys have any wiggle room at any point to get out of that Screenvision contract?

And then secondly, with regard to 3-D, I know Dreamworks Animation is - they've got the first major 3-D film out the end of March of 2009, and they've talked about having 3,000 to 3,500 screens. Now if you took your market share, that would suggest you're going to have, you know, enough 3-D screens - 6, 700 3-D screens  and you'd probably be - overweight the industry. So is there going to be enough time to get that number of screens fitted with 3-D?

Michael L. Campbell - Chairman, CEO

Yeah, let's start with the 3-D question first. I mean, clearly, as we've stated before, I think the continued rollout of 3-D technology is, you know, entirely dependent upon the pace of conversion to large digital projectors in general. And as we said earlier, you know, this is a very complex process, to get all the studios and all of our exhibiter partners together. We are making progress. We're getting very close, I think, to having the final, you know, few points agreed to with the majority of the studios. But clearly I think to meet that goal it's going to depend on how quickly, you know, the overall digital deal gets done.

Now with that being said, once we do start rolling out digital later this year we can always target if we wish locations where we want to add 3-D quickly without necessarily converting to all-digital systems at the same time. So I think there are ways that we can enhance the rollout of 3-D in order to meet those targets.

But at the end of the day, I mean, I can't really give you any assurance the industry will have 3,000 screens or more ready by that time. But I think, you know, it's possible.

Eric Handler - Lehman Brothers

Okay. Thank you.

Amy E. Miles - CFO, EVP, Treasurer

Yeah, and Eric, you were close on your Screenvision date. You know, we'll evaluate, you know, our rights with respect to that contract subsequent to closing. But remember, from Regal's perspective - I mean, I shouldn't comment on that today, but with respect to, you know, Regal's flexibility, we could with National CineMedia go ahead and make the decision to, you know, give equity in National CineMedia and in turn compensation National CineMedia by passing through those Screenvision payments similar to what AMC and Loews did.

So we do have flexibility with respect to National CineMedia as it relates to the Screenvision contract.

Eric Handler - Lehman Brothers

You wouldn't have to re-work your NCMI contract to get the equity in exchange for the passthrough?

Amy E. Miles - CFO, EVP, Treasurer

No, we wouldn't.

Eric Handler - Lehman Brothers

Okay, thank you.

Operator

Thank you. Our next question's coming from Lloyd Walmsley of Thomas Weisel Partners.

Lloyd Walmsley - Thomas Weisel Partners

Great. Thanks for taking my question. Just wondering if you could comment a little bit on how you see the opportunity for 3-D in terms of new release 3-D, rereleased 3-D, and then alternative events such as Hannah Montana. And do you see the re-release kicking in probably later when the screen counts are higher? Thanks.

Michael L. Campbell - Chairman, CEO

Yeah, I think re-release is certainly going to be part of this equation for 3-D. I mean, you've had, you know, some preliminary announcements from people like Lucas about remodelling the Star Wars into 3-D re-releases. Disney recently announced that they were going to re-master Toy Story 1 and Toy Story 2 in 3D and release those in 3D as well as producing the new Toy Story 3 in 3-D.

So I think this will be a significant part of the business, and I think it's a great opportunity for the industry to capitalize on re-releases, which is something that hasn't been possible, probably, in several decades, you know, because it's a pattern where re-releases don't succeed because they've gone to other ancillary markets, and this opens up that window again.

Clearly I think there are opportunities for continued expansion of alternative programming going forward, although that's been, you know, slow to develop. But I think that clearly, with the success that we've seen recently, that will continue.

And we continue to see new films being added to the release schedule that are slotted for 3-D that are brand-new productions that are not re-mastered films.

Lloyd Walmsley - Thomas Weisel Partners

And how have you seen concession sales in the 3-D historically?

Michael L. Campbell - Chairman, CEO

We haven't really seen any change. I mean, we - I think it's still more related to the genre of the product and not the fact that it's 3-D. I mean, we're not seeing any incremental concession sales as a result of the 3-D technology, nor any decline in those sales. It's more related to the type of film.

Lloyd Walmsley - Thomas Weisel Partners

Great. Thank you.

Operator

Thank you. Our next question comes from Michael Savner of Banc of America Securities.

Michael Savner - Banc of America Securities

Hi, good morning. Thanks. I have a couple quick ones as well.

Amy, first a really fast one. Just to make sure, when you said you were comfortable with the higher end of the street at $575 to $595 of EBITDA in '08, that includes your distributions from [NCF], correct?

Amy E. Miles - CFO, EVP, Treasurer

It sure does.

Michael Savner - Banc of America Securities

Okay, thank you. And then secondly, Amy, maybe can you tell us about ticket price increases expectations, you know, as we look at model - since you went public, re-public in '02, '07 appears to be near the high-water mark of ticket price increases, if not the high-water mark. You know, do you see that type of aggressive, you know, pricing power in '08? Would it revert back to normal, or is it just inevitable that after a year like this maybe you take a break and take a price increase and actually come in slightly below where they are historically at kind of 3% growth?

Amy E. Miles - CFO, EVP, Treasurer

Yeah. I mean, I think, Michael, just if you look at a [inaudible] for our industry - or, I'm sorry, for the company, and say would you expect to have, you know, historical increases around that 3% to 4%, yes, we would.

But that should be benefited during this fiscal year by continued 3-D products and IMAX product, which has, you know, much more of a premium. So from that perspective, any increases that we would expect over that historical 3% to 4% are going to be driven by premium-priced IMAX and 3-D films.

Michael Savner - Banc of America Securities

So that would be incremental to the 3% to 4%?

Amy E. Miles - CFO, EVP, Treasurer

Yes, it sure will.

Michael Savner - Banc of America Securities

Terrific, thanks. And then last question, maybe just a little bit more granularity on the Consolidated acquisition. I think the revenue numbers you threw out were obviously very big, so I'm going to go out on a limb and suspect that's not [break in audio] pure organic growth. So can you give us a little bit more color on what the organic growth profile is relative to the industry? Are we talking, you know, 100, 200 basis points in excess? And then what the screen growth plan is there, or is that already netted out in your overall guidance that you provided for screen growth in '08?

Amy E. Miles - CFO, EVP, Treasurer

Yeah. With respect to their same screen, you're right. It would be, you know, a couple hundred basis points higher than the industry. A lot of their growth has been driven by the fact they've put a lot of new assets in the ground, however we would expect that those newer assets - and remember that, you know, 80% of those were built since 2002 - they opened three new theaters in '07 and three new theaters in '06 out of the 28, so it's a really new asset base.

So what we see in those theaters is that, you know, in addition to having growth just from being a new screen, you see growth from the perspective that, you know, the newer assets outperform the industry average. So we would expect that from the Consolidated Theater.

And I'm sorry, Michael, you asked me one more question with respect to -

Michael Savner - Banc of America Securities

What did I ask you? I think just whether your screen growth plans overall were included in Consolidated, but I think you already answered that.

Amy E. Miles - CFO, EVP, Treasurer

Yeah. You know, with respect to the top line of new assets, what you see, you know, moved in or merged in with Regal's overall Capex guidance.

Michael Savner - Banc of America Securities

And would you like to see us model this in closing by the end of 2Q or 3Q?

Amy E. Miles - CFO, EVP, Treasurer

I would say the beginning of 3Q would be, you know, the best place to start.

Michael Savner - Banc of America Securities

Terrific. Thanks very much, Amy.

Operator

Thank you. Our next question is coming from Barton Crockett of J.P. Morgan Chase & Co.

Barton Crockett - J.P. Morgan Securities

Okay, great. Thank you very much for taking the question.

One or two topics I'd like to ask you about. First is just taking a kind of broader, you know, credit markets broadly are turbulent right now, so I was just wondering if you could comment on what impact, if any, that would have on really two issues, one the financing kind of work you wanted for DCIP. Is that a complicating factor, or maybe one of the sources of this, you know, being a little bit delayed, I think, versus what some of us had been expected? And also what does it mean for the acquisition environment. That's one set of questions.

Amy E. Miles - CFO, EVP, Treasurer

I think with respect to the - obviously, you know, you wish you were financing DCIP maybe two years ago instead of today, you know. However if we continue to finalize the studios and work with, you know, various financing sources, we still continue to believe that it's a deal that can be financed. It maybe in a different than we maybe thought originally, but, you know, we're still confident and are still being advised by the, you know, financial advisors who are participating in this, Barton, that we structure a deal in a way that we can raise the financing.

And with respect to the acquisition environment, you know, we really saw a benefit for Regal with respect to the Consolidated process in the fact that we had, you know, we could execute the acquisition with cash on our balance sheet. So, you know, from that perspective it's been an advantage to have cash.

And we still believe that companies are going to come to market with respect to the credit market and, you know, it just might be a little bit more expensive to finance today, but that the theater sector would still have access to credit.

Barton Crockett - J.P. Morgan Securities

Okay. And then a follow-up question. It's on the Consolidated acquisition.

When you guys say it's accretive, I was wondering if you could give us a little bit of color on your D&A assumption and the interest, you know, cost. It's right at, you know, $210 million to cash assumption that goes into the accretion [target].

Amy E. Miles - CFO, EVP, Treasurer

I mean, I guess you could think about its appreciation for that [inaudible]. If you take the 210 and divide it by 15, that should be pretty close to what depreciation will be created.

And with respect to - obviously we used cash on the balance sheet, so you could debate how you calculate that accretion, but with alternative uses of that cash.

Barton Crockett - J.P. Morgan Securities

Right.

Amy E. Miles - CFO, EVP, Treasurer

But as far as, you know, we've thought about that is, you know, we could pay down debt with that, but we're under levered as it is, so from that perspective that's just, you know, cash that's sitting on our balance sheet that, you know, earns 4% a year.

Barton Crockett - J.P. Morgan Securities

Okay. So you used the cash interest income as opposed to the debt interest?

Amy E. Miles - CFO, EVP, Treasurer

Yeah. And even if you'd use the debt or, you know, call it our cash [inaudible] comes today of about 4%. Our average cost of debt today is probably right around, you know, 6% to 7%, pre-tax. It would be accretive either way.

Barton Crockett - J.P. Morgan Securities

Okay. Sounds great. Thanks a lot.

[break in audio]

Operator

Thank you. Our next question is coming from David Miller of SMH Capital.

David Miller - SMH Capital

Yeah, hi. Can you hear me? Hello?

Amy E. Miles - CFO, EVP, Treasurer

Hello?

David Miller - SMH Capital

Can you hear me?

Amy E. Miles - CFO, EVP, Treasurer

Yes.

David Miller - SMH Capital

Okay, sorry about that. I thought we had a little bit of a technical glitch there.

Just a couple questions. Amy, obviously there were a lot of extraordinary items in 2007. Can you talk about what organic returns on invested capital were in 2007 excluding the extraordinary items?

And then Michael, the average concession in the fourth quarter was up 4.2% year-over-year. Is that sort of a growth rate, sort of run rate type growth rate that you would be comfortable with as we get into the meat of 2008?

Thanks very much.

Michael L. Campbell - Chairman, CEO

Yeah. Regarding the concession, yeah, we've said before that I think there's a little more pressure on us, you know, with concession price increases than the box office. But we're still comfortable with that 2% to 3% in concession. We've been able to do better than that in certain years, but part of that is due to, you know, product mix, not just pricing. But, I mean, we're comfortable with the 2% to 3% in concession. Anything above that, I think, is speculative.

Amy E. Miles - CFO, EVP, Treasurer

And David, I obviously don't have a return on invested capital here sitting with me, but if you wanted to calculate that, obviously all of the extraordinary items are detailed and segregated in the company's financial statements, so none of those would be included in the, you know, in buried expenses or anything like that. So if you wanted to segregate those, that should be an easy calculation.

David Miller - SMH Capital

Okay. Thank you.

Operator

Thank you. Our next question's coming from Matthew Harrigan of Ferris, Baker Watts.

Matthew Harrigan - Ferris, Baker Watts

Good morning. I hate to ask you another IMAX question as [inaudible] follow, but on Beowulf, there's a pretty decided asymmetry between the results in IMAX versus Real D, even as the ticket prices in Real D were a little bit lower.

I was curious as to whether you felt that that was just a matter of an education process, bringing the consumer along over time, or whether on some of the usual formats that the price premium and the effect on attendance wouldn't be quite as market as it has been on certain releases in the past on IMAX.

Michael L. Campbell - Chairman, CEO

I think there's several factors, and you've touched on a couple of those.

Clearly, there is some additional pricing premium associated with the IMAX brand. I mean, it is an established brand. In general, those auditoriums are significantly larger as far as seating capacity than the Real D auditoriums as well. Most of the Real D auditoriums at least today are confined to what we would call mid-sized theaters that are probably 2 to 250 seats.

Matthew Harrigan - Ferris, Baker Watts

Sure.

Michael L. Campbell - Chairman, CEO

With IMAX, you know, some of the IMAX auditoriums are certainly, you know, up to 400, 500 seats in many cases.

However, Real D is advancing their technology and in fact next week we're going to see some of the new technology that takes Real D up to a 60- to 70-foot screen, which would imply that Real D deployments going forward could be in larger auditoriums.

But clearly, IMAX has a brand name that's well established and, you know, as we see it going forward, I think you're still going to see a limited number of IMAX screens across the country. Although that footprint is growing, it's not going to ever equal, you know, what you can do with Real D or some of the other, you know, 3-D systems that are coming into play.

So we still see a pattern here where we can benefit, you know, three ways. We can benefit with IMAX at the top of the food chain. We can benefit with Real D or comparable technology to that in the middle, and then you still have your 2-D alternative.

Matthew Harrigan - Ferris, Baker Watts

Great. Thank you.

Operator

Thank you. Our next question's coming from Drew Crum of Stifel Nicolaus.

Drew E. Crum - Stifel Nicolaus

Thanks. Good morning, everyone.

Michael, I wonder if you could give us an update on any new developments on the competitive front with 3-D. I know there was a new competitor entering the market up against Real D last quarter that you mentioned.

Amy, I wonder if you could talk about swing factors on free cash flow. You've given the Capex guidance. Is there anything one-time we should expect in working capital?

And then just a housecleaning item. The tax rate, down a little bit in the fourth quarter - what should we be modelling for in 2008?

Thanks.

Michael L. Campbell - Chairman, CEO

Yeah, regarding competitive systems to Real D, I think clearly we have deployed thus far, you know, Real D systems. We really like the Real D technology, and we think they have, you know, at least today, a competitive edge. But clearly we're going to evaluate all other technology before we do a broader rollout. But, you know, today it's Real D primarily.

Amy E. Miles - CFO, EVP, Treasurer

Hi. With respect to your questions on the financial statements, I wouldn't expect any abnormalities in working capital for next year. I would highlight that since we do have a 53rd week, that will include - our bank and interest as payments are on a quarterly basis, so we will have five payments next year instead of our typical four because of the 53rd week, so I'll just highlight that. But again, that'll be offset by the, you know, incremental cash flow with the 53rd week.

Our tax rate is lower in the quarter due to the benefit of some NOLs that we took during the fourth quarter, and I would expect it to be 40% on a going forward basis.

Drew E. Crum - Stifel Nicolaus

Okay, great. Thanks, guys.

Operator

Thank you. Our next question is coming from Hunter DuBose of Morgan Stanley.

Hunter R. DuBose - Morgan Stanley

Good morning, guys. I have a couple questions for you.

The first one is it looks like other revenue was up about 43% sequentially, and if I'm doing the math right pro forma for the revised [NCM] economics, it looks like it was up about 27% year-on-year.

Can you give us some more color about what was actually going on there, and is it something that you would expect to be sustainably higher on a going forward basis, either for the full year or for the fourth quarter of '08?

And then my second question is: Can you give us some guidance as to when we can expect to hear disclosure around your increase in equity stake in NCM?

Amy E. Miles - CFO, EVP, Treasurer

Sure. With respect to your first question, a lot of the growth in other revenue this quarter, we had - and for the fiscal year - we had growth in our vendor marketing programs as we've continued to expand, you know, those programs with our various concession providers. And the biggest driver there is revenue that we have recognized from, you know, gift certificates and gift cards and unused tickets.

And about - I'm going to say 12 to 18 months ago - we started a pretty aggressive new gift card program where we went out to various C stores, you know, convenience stores, to grocery stores, and now you can see Regal gift cards in a lot more outlets where historically we were selling those primarily at the corporate office and the theater. And I think for the 2007 fiscal year, we had just under $180 million of sales generated from, you know, this new program, and it was a substantial increase over the prior year.

As a result of that, you've seen some, you know, associated increase in our gift certificate breakage, and it's really just driven primarily by the fact that those sales are up about 30%, so in exchange, our breakage is up about 30%.

So I would expect, just to conclude on that, continued growth in that line item, but again, this was our first year where you saw a lot of the initial benefit of that new sales program.

Hunter R. DuBose - Morgan Stanley

Okay. And on the NCM equity stake?

Amy E. Miles - CFO, EVP, Treasurer

Well, with respect to the timing of that - what are you asking exactly, Hunter?

Hunter R. DuBose - Morgan Stanley

Well, my understanding of how the [inaudible] adjusting agreement works is that every December 31 there's a true up in your equity position to reflect your net contribution to attendance for NCM for the prior year.

Amy E. Miles - CFO, EVP, Treasurer

That's right. Right.

Hunter R. DuBose - Morgan Stanley

I just want to get clarity around when can we expect your disclosure on what -

Amy E. Miles - CFO, EVP, Treasurer

Oh, okay. I'm sorry. I would expect that we would have that during our first quarter.

Hunter R. DuBose - Morgan Stanley

Okay.

Amy E. Miles - CFO, EVP, Treasurer

Yeah, that would be during the first quarter.

Hunter R. DuBose - Morgan Stanley

Great. Thank you.

Operator

Ladies and gentlemen, we have reached the allotted time for questions. I'll hand the floor back over to management for any closing comments.

Michael L. Campbell - Chairman, CEO

We appreciate everybody dialling in for our conference call, and we look forward to talking to you again in a few months about the first quarter. Thank you very much.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: Regal Entertainment Group Q4 2007 Earnings Call Transcript

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