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Regal Entertainment Group (RGC)

Q4 2005 Earnings Conference Call

February 7th 2006, 9:30 AM.

Executives:

Don De Laria, Regal Entertainment Group - VP IR

Michael Campbell, Regal Entertainment Group - Chairman & CEO, and Regal Cinemas Corporation - CEO

Amy Miles - Regal Entertainment Group - CFO, Principal Accounting Officer, EVP & Treasurer, and Regal Cinemas Incorporated - CFO, EVP & Treasurer

Analysts:

Michael Savner, Banc of America

Glen Reid, Bear Stearns

Gordon Hodge, Thomas Weisel Partners

Carl Gardner, North Sound Capital

Tuna Amobi, Standard & Poor's

Jeff Logsdon, Harris Nesbitt

Operator

Good morning, my name is Joy and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regal Entertainment Group Fourth-Quarter and Year-End 2005 Earnings Release and Conference Call, with our host, Mike Campbell, Chief Executive Officer of Regal Entertainment Group and Chief Executive Officer of Regal Cinemas; and Amy Miles, Chief Financial Officer and Treasurer of Regal Entertainment Group. All lines have been placed on mute to prevent any background noise. After management's remarks, there will be a question-and-answer period. Operator Instructions. I would now like to turn the call over to Don De Laria, Vice President of Investor Relations. Please go ahead, sir.

Don De Laria, Regal Entertainment Group - VP IR

Good morning. And before we begin today I would like to remind our listeners that this conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934 as amended. All statements other than statements of historical facts communicated during this conference call may constitute forward-looking statements. These forward-looking statements involve risks and uncertainties. Important factors that can cause actual results to differ materially from the Company's expectations are disclosed in the risk factors contained in the Company's annual report on Form 10-K dated March 15, 2005. All forward-looking statements are expressly qualified in their entirety by such factors. Now I will turn the call over to Mike Campbell.

Michael Campbell, Regal Entertainment Group - Chairman & CEO, and Regal Cinemas Corporation - CEO

Thanks, Don, and welcome and thank you for dialing in to our fourth-quarter conference call. Today I will provide, number one, an overview of the industry's and Regal's fourth-quarter results; a brief recap of the 2005 fiscal year; an update on the National CineMedia efforts; and a review of current trends in the exhibition industry, including some of our expectations regarding box office trends for 2006.Following my remarks, Amy Miles will provide a summary review of our financial results. As always, we will conclude the call with a question-and-answer session.

Now, turning to fourth-quarter industry results, the industry box office saw successful openings and solid performances during the fourth quarter from several films, including The Chronicles of Narnia: The Lion, the Witch and the Wardrobe, which has currently grossed $282 million since release; Harry Potter at $286 million; King Kong at $215 million; Chicken Little $134 million; and Walk the Line currently at $111 million.

Although the fourth quarter of 2005 included the strong performances of these key pictures, as evidenced by the fact the top three films in the quarter have grossed to date over $783 million in the aggregate, the strength in the back half of the quarter was offset by the decline in industry box office during the first half of the quarter, producing a flat year-over-year box office.

For the period that corresponds to Regal's fourth fiscal quarter, EDI reported a domestic box office revenue decrease of approximately 2/10 of 1%. Other industry sources for the period that correspond with Regal's fiscal fourth quarter show change in domestic box-office revenues ranging from minus 1% to plus 1%. As previously mentioned, and as we expected, the latter half of the fourth quarter reflected solid year-over-year growth in the industry box office; and the industry benefited from the strong carryover of the fourth-quarter film product throughout January as well. The industry has reported positive week-to-week comparisons for 10 out of the last 12 weeks versus the year-ago period.

Now turning briefly to Regal's fourth-quarter results, due to the benefit of our acquisition strategy, we again outperformed the industry top-line results, as we reported total box office revenues of approximately $437.5 million, which represented a 2% increase over the prior year. Also, in a quarter of flat industry box office, we are pleased to report the following highlights.

We reported a 3.9% increase in total revenues, coupled with a 43.3% increase in net income. We continued to benefit from our concession programs, and we're pleased to report a 6.7% increase in concession per caps.

Our fourth-quarter results also include $24.8 million of adjusted EBITDA from National CineMedia, which represents growth of 40% over the fourth quarter of last year. Adjusted EBITDA was approximately $145.5 million for the quarter, which represents growth of 9.6% over the prior-year fourth quarter. We were also pleased with the associated 120 basis point improvement in our adjusted EBITDA margins, which totaled

21.8% for the fourth quarter.

Moving to a few comments regarding our fiscal 2005 results, the 2005 fiscal year was a challenging year for the industry and the Company. The industry was negatively impacted by the decline in industry attendance and the resulting declines in cash flows. As I will address in more detail later in my remarks, we continue to believe the attendance decline is primarily due to the cyclical nature of our business.

On a positive note, I would like to highlight Regal’s strategic accomplishments during the 2005 fiscal year. We demonstrated our continued commitment to returning shareholder value by maintaining our dividend strategy. Including the dividend announced today, we have rewarded the shareholders with aggregate cash dividends of approximately $13.16 per share since we went public in 2002. Secondly, we completed the strategic and

highly accretive acquisitions of Eastern Federal and certain RC theaters. We also participated in the successful formation of National CineMedia and continue to believe this investment will provide incremental value for our shareholders.

Lastly, in spite of the downturn in attendance we continued to generate significant free cash flow during the fiscal year and ended the year with just under $200 million of cash on our balance sheet. The cash on hand provides additional financial flexibility to pursue prudent growth opportunities and supports our dividend strategy.

Now for a brief update on National CineMedia, which is Regal's joint venture with AMC and Cinemark. During the fourth quarter, Cinemark continued installing the digital equipment necessary to participate in this high-margin opportunity. We are pleased to report that the installation is on track, with all 2,300 screens scheduled to be deployed by the end of April of this year. This will bring total DCN screens to approximately 11,100, covering approximately 550 million patrons in 49 of the top 50 DMAs and over 120 DMAs in total.

The new preshow called The First Look was launched in January 2006 across the DCN. The new show is higher quality and will, as the name indicates, start to focus on original content that is made specifically for cinema or as a first-release window for advertising and marketing content before it is released on television.

National CineMedia is making progress on the digital cinema initiative as well. Conversations with manufacturers, financing sources, and studios are underway; and we expect that NCM's purchasing power and distribution capability will lower the overall system cost, providing financial benefits to both participating studios as well as NCM exhibitor members.

NCM continues to deliver the financial benefits that we expected from combining the distribution of three major circuits. Also, NCM is well positioned to generate incremental revenue and EBITDA opportunities.

Now let's turn to industry trends and expectations for fiscal 2006. First of all, I would like to address recent comments about our industry as it relates to box office windows and attendance trends. In 2005, the average window between theatrical release and in-home or DVD release was approximately 129 days. This represents a contraction in the theatrical window of only six days compared to 2004. This six-day contraction is consistent with the overall trend in the shortening of the theatrical window over the past five to six years and does not represent a material change in the studio distribution model to movie theaters.

In our opinion, the reality of the actual contraction in the window period and the perceived impact on the industry box office during the current year has been overstated in many media reports. As a Company we will, however, continue to aggressively monitor the status of the theatrical window and are increasing our focus on the theatrical window during our film exhibition decisions. It is also important to note that our discussions with many of the studio heads continue to support our position regarding the value of the theatrical windows for both distribution and exhibition.

Now with respect to movie attendance, late in 2005 the National Association of Theatre Owners, known as NATO, conducted a survey that asked moviegoers what had caused them to cut back on movie-going frequency in 2005. The number one response was that there was nothing playing that they wanted to see. We maintain our assertion that while there are indeed many new forms of technology competing for the public's attention, there is still no substitute for a quality movie at the Megaplex. Quality product does bring people to the movie theater.

The historical record supports the theory that the downswing may simply be a cyclical phenomenon. In the mid-1980s, the industry hit a 10-year low point. In 1986 admissions numbered 1.02 billion, the lowest number since 1976; and that was despite having 6,389 more screens and 245 additional film releases versus '76. But from that low the industry recovered and by 1989 reached 1.26 billion in admissions.

Similar trends have been noted during other three to five-year time periods. During the last seven to 10 years, movie attendance has hovered around 1.5 billion attendees every year. That being said, we will continue to focus on providing the best customer experience in our theaters and providing the best atmosphere for retaining and growing our customer base.

And lastly, with respect to our expectations for 2006 fiscal year, as previously stated we began the first quarter this year with strong carryover business from The Chronicles of Narnia, King Kong, and other films. January also saw strong openings from Hostel, Glory Road, and Underworld -- Evolution. We continue to be optimistic

about the film slate in the Company's fiscal first quarter.

January finished up 10.1% and the February month-to-date box office through last Sunday is up 5.2%. Our expectations for strong film product for the 2006 fiscal year are based primarily on the expected strength of the films scheduled for release in the second and third quarters of this year. At this point, we have decent visibility into the second-quarter film slate, which we believe looks good. We're particularly excited about Ice Age 2, X-Men 3, DreamWorks' Over the Hedge, Mission Impossible, The Poseidon Adventure, The Da Vinci Code, Pixar's Cars, and Disney's Pirates of the Caribbean 2. And then our fiscal third quarter will begin with the highly anticipated Superman Returns.

Overall for the 2006 fiscal year, we would expect some modest rebound in attendance, coupled with historical increases in ticket prices and concession per cap. We would also expect the top-line results to be supported by our continued focus on efficient theater operations and incremental growth from our 2005 acquisitions and our National CineMedia investment.

So in summary, we are pleased with the box office environment in the latter half of the fourth quarter and our ability to manage through a very challenging 2005. We continue to be excited about opportunities within National CineMedia and also the upcoming summer film slate. I would like to turn over the presentation now to Amy Miles, our CFO, to discuss the Company's financial performance.

Amy Miles - Regal Entertainment Group - CFO, Principal Accounting Officer, EVP & Treasurer, and Regal Cinemas Incorporated - CFO, EVP & Treasurer

Thanks, Mike, and good morning. Today I would like to provide additional details on the Company's fiscal fourth-quarter results, provide an update with respect to our balance sheet and CapEx, and conclude with an update on the National CineMedia results for the quarter.

Regal Entertainment Group reported total revenues of $668.2 million, consisting of $437.5 million from box office revenues, $173.9 million from concessions, and $56.8 million of other operating revenues. Our total revenues increased this quarter approximately 3.9% over the prior comparable period, primarily as the result of acquisitions, which resulted in a net increase in approximately 190 screens and that more than offset a weak box office.

Our admissions revenue this quarter increased approximately 2.1%, again, primarily as a result of acquisitions, coupled with an average ticket price increase of 4.1%, and that more than offset a 2% attendance decline. We obviously outperformed the industry box office results due to the additional acquired screens. However, on a per-screen basis, our admissions revenue approximated the industry results for the quarter.

Concession revenues this quarter increased just under 5% to $173.9 million. On a per-screen basis, concessions revenues increased 1%; and on per-cap basis concessions revenue increased 6.7%. As we have stated in previous quarters, we implemented changes in our pricing and product mix of our Regal Combo program. The changes, coupled with a concession-friendly film mix resulted in strong growth in the

concession per-cap this quarter.

Other revenues during the fourth fiscal quarter of 2005 increased 16.2% over the comparable quarter of 2004 to $56.8 million. The increase in other revenues is related to increases in vendor marketing and other theater programs, coupled with increases in National CineMedia. While National CineMedia exceeded its revenue target and grew advertising revenues over the prior fourth year comparison, approximately $9.9 million of advertising revenue is recorded in our income statement on a net basis. I will provide additional information with respect to National CineMedia revenues and operating results later in my remarks.

Looking briefly at our expense line for the fiscal quarter, film and advertising as a percent of box office for the current quarter represented 53.7% of admissions revenue. Film rental and advertising decreased by 120 basis points over the prior comparable quarter, primarily as a result of the mix of film product during the quarter.

Before our vendor marketing programs, our concessions produced a gross margin of 14.4% this quarter, which represents a 40 basis point decrease over the comparable quarter of '04.Total rent expense increased to $4 million or approximately 5%. This is due primarily to the inclusion of additional theaters and screens during the past year. On a per-screen basis, rent expense increased approximately 1.3% this quarter.

Again, due to the accounting for 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 G&A increased approximately 5.1% for the quarter, primarily as a result of additional screens added during the year. On a per-screen basis the two line items together increased just over 1%.The fourth quarter produced adjusted EBITDA of 145.5 million, which was in line with the consensus estimate for the quarter. Also we were pleased to report a 17% increase in free cash flow in the quarterly result. The growth in free cash flow is primarily due to a decline in net capital expenditures.

Adjusted diluted earnings per share increased 41.2% to $0.21 for the quarter; and again, adjusted EPS was in line with expectations.

Turning briefly to our balance sheet and asset base, we ended the quarter with approximately $196.3 million in cash, and a total debt balance of just under $2 billion, which resulted in a net debt to adjusted EBITDA ratio of approximately 3.5 times the pro forma for our acquisitions. With respect to our year-end cash balance, we think it's important to note that we started the year with approximately $243 million of cash; we returned value to shareholders in the form of quarterly dividends totaling $175 million; we invested approximately $155 million in strategic acquisitions; and ended the year with just under $200 million of cash. This represented strong free cash flow generation even against the backdrop of a down box office year. This demonstrates both our commitment to returning value to shareholders, as well as our focus on generating free cash flows.

Turning briefly to CapEx, CapEx during the fourth quarter totaled $41.2 million. During the quarter, the Company recorded net proceeds from asset sales of approximately $26.3 million; and as such the net CapEx was $14.9 million.

During the fourth fiscal quarter of '05, we opened four theaters with 59 screens and closed 17 theaters with 133 screens, bringing our total to 550 theaters with 6,463 screens. Looking forward to fiscal '06 we expect to open approximately 10 theaters with 150 screens and close approximately 15 theaters with 100 screens, increasing our net screen count by approximately 50 screens or just under 1% by the end of fiscal '06.We presently expect our 2006 CapEx to total between 135 and $150 million, of which 10 to $20 million we expect to be funded by asset sales.

Now turning briefly to the financial highlights of National CineMedia for the quarter. This calendar fourth quarter represents the third quarter of operations for National CineMedia. While Cinemark has joined NCM as a founding member during the third quarter, they're currently working on installing the digital network and, as such, will not have any significant impact on NCM's results until Q2 of 2006.The total revenues related to Regal Entertainment Group's portion of the National CineMedia and other advertising contracts were $31.7 million for the fourth quarter of 2005, of which $29.7 million is included in our line item other revenues. The balance would be reflected in our box office revenues.

As previously mentioned, a portion of the NCM fourth-quarter revenue has not been recorded on a consistent basis with that of the Q4 of '04, as approximately $9.9 million of advertising revenues has been recorded on a net versus gross basis. The NCM advertising revenues as adjusted for the accounting differences grew approximately 24.9% quarter-over-quarter, due to incremental screens supplementing the revenue growth, coupled with increased utilization.

Total adjusted EBITDA related to our National CineMedia investment totaled $24.8 million, compared to $17.7 million for the same period last year. This adjusted EBITDA represents a growth of approximately 40%. Margins remained very high and include the benefits of synergies associated with a larger network.

As a reminder, the presentation of our financial statements with respect to National CineMedia will change beginning in the first quarter of '06. At that time the majority of the advertising contracts will reside with National CineMedia, and not with Regal Entertainment. As such, we will report our share of National CineMedia revenues net of expenses as other revenue on Regal Entertainment Group's income statement. As Mike previously stated, we remain excited about the NCM business and free cash flow it contributes to Regal. We continue to believe the NCM business has solid growth potential; and coupled with the high-margin characteristics, NCM should continue to provide free cash flow growth for Regal and its shareholders.

Just a few comments with respect to some assumptions for 2006. In addition to reviewing our reported results for the quarter, we thought we may provide some highlights with respect to our expectations for '06. With respect to the top line, we continue to believe that Regal will be able to maintain ticket per cap increases in line with historical averages of 3% to 4%. We expect Regal's concession per cap to continue at an above-average rate into the mid to high single digit rate of increase during the first quarter of '06 and then to normalize to historical increases thereafter for the remainder of '06. That difference over the quarters is due to the timing of the changes we made in our concession program.

Other operating expenses should be consistent with the 2005 reporting number, as the line item will decline due to the change in accounting for National CineMedia, offset by increases from the additional Eastern Federal screens and inflationary increases in cost lines. Interest expense should approximate to annualized fourth-quarter expense. With respect to adjusted EBITDA expectations for fiscal '06, the majority of the sell-side analysts have published adjusted EBITDA ranges or targets ranging from 545 to $560 million. Assuming a rebound in attendance, in industry attendance of 1$ to 3%, we believe that range of adjusted EBITDA would be appropriate.

In closing, we were pleased to report growth in revenues and adjusted EBITDA that was in line with consensus in a period of flat national box office results. As Mike previously stated, we were also pleased with many of our strategic accomplishments in the '05 fiscal period. We were pleased to report our dividend again at $0.30; and we look forward to continued growth from NCM and a solid 2006 film slate.

That concludes our remarks. We will now take any questions you have.

Questions-and-Answer Session

Operator

Operator Instructions. The first is coming from Mr. Michael Savner with Banc of America. Please state your question.

Q - Michael Savner

Hi good morning, thanks very much. A Couple quick questions for Amy, and then one for Mike. First, on the film rent expense, if you could just give us a little bit more granularity on that, Amy. Because it looks like, I think you said film mix helped in the quarter; but you obviously had much higher profile releases in this fourth quarter relative to last year. So maybe if there’s any other underlying trend, obviously on the positive side, that helped, kept that down. Or maybe it was just a question of a lot of less expensive middle tier movies that resulted in that lower number? Then maybe secondly on working cap, obviously a big benefit again this year as well as last year, and how we should think about that going forward. If some of that contribution comes from the closing of theaters, or kind of what is driving that? Then the one for Mike, I think your comments on where the major studios are on the theatrical windows were relatively straightforward. But to your knowledge, even without naming names, are you aware of any tier-one top kind of day and date releases planned at any time in '06, beyond the kind of real small stuff that we have seen over the last couple months? Thanks very much.

A - Michael Campbell

Michael, I will start first and then we can work backwards. As far as the theatrical windows, as I said earlier, I think there has been just a lot of overblown speculation in the press. I mean, we are really not seeing that. And other than some of these small films that are produced on very low budgets and these are really just experiment, I am not aware of any major studio, any major production that is scheduled or even being considered for a day and date release. I mean, it just, in our opinion and certainly this is shared by most of the studio heads, it really just doesn't make sense economically for either side to go down this path.

A - Amy Miles

Okay, with respect to your two financial questions, Michael, first with respect to film and advertising, we did have a lot of improvement in this line item for the quarter. But we always try to be cautionary with respect to any kind of quarterly trends in film rents, our film and advertising expense, and look at that number more on a trailing 12 basis. The other thing I can say is what -- it is not just kind of the films that are released during the quarter, but also the studios that release those films will have an impact with respect to your overall expense. And you're right; you did have on what I would call your second-tier pictures which helped that expense during the quarter. From a working capital perspective, again, the fourth quarter if you look historically for the industry, a little similar to the second quarter; but obviously the fourth quarter to a much greater degree gives the industry and particularly the Company a lot of working capital benefit. Particularly in the fourth quarter our interest payments are due December 31. The quarter ends before that date. So you have accrued interest of at least, let's say, $27 million. The balance of working capital will be the difference in book taxes and cash taxes, as well as your accrual for film payment. So you can think you have a very strong December, and you don't actually start paying the cash for the films until first quarter. So hopefully that answers your two questions with respect to film and working capital.

Q - Michael Savner

It does, thank you.

A - Amy Miles

Okay.

Operator

Our next question is coming from Mr. Glen Reid with Bear Stearns. Please state your question.

Q - Glen Reid

Hi thanks, good morning. I have three questions. First, ticket price increases and concession price increases, if you could kind of -- I know you're working through and have been pretty successful at changing the mix of your concession offerings and whatnot. But I am wondering if you could comment on price increases both on the ticket side and the concessions. Secondly, there is a lot of speculation about Regal's intentions with National CineMedia, in terms of spinning that out in some form or another at some point. And I wondered if you could comment on why that may or may not make sense; and sort of where your thinking is on that. Lastly, on the acquisition environment, if you could sort of comment on how things are looking at this point and what your thoughts are there. Thanks.

A - Michael Campbell

What was the last question, Glen?

Q - Glen Reid

It was acquisitions; sort of what your thoughts are on the landscape out there in terms of what may come up over the next year or so; and what your views are towards acquisitions still.

A - Michael Campbell

Okay, maybe just working backwards again, acquisition environment, clearly, we had a couple of good acquisitions early in 2005. But the current state, I think, is not particularly favorable for acquisitions, for the following reason. I think when you're in a down attendance environment, if you are a seller, unless you are a distressed seller; you really don't want to sell your assets during a year, on a cyclical business, where attendance is down. Because most of those transactions are based on trailing 12-month cash flows. So I think you have a varying sellers and then consequently buyers such as Regal and other people that are looking at assets, we believe we can pick up some bargains in this environment, but quite honestly we would like to see some rebound in attendance as well. So I think that could pick up. The universe could become larger as attendance picks back up again.

A - Amy Miles

Okay, I will take your questions with respect to ticket prices and concessions. I think if you can think about -- I am not sure if you were asking more for what we expect going forward or what has happened this year, but from a this-year perspective, what you see on the ticket price increase is a lot just an increase in pricing. We didn't really have that much of an impact on your ticket prices from a film mix perspective. So you can think about that more as just a pure pricing increase. With respect to the concessions, ending the year up between 6% and 7%-ish for the year, I would categorize that as primarily the changes in the concession program, aided by the film product this year, which was very strong from a concession perspective and you see that throughout the industry; and what I would characterize as minimal price increases, minimal being 1% to 2%.

Q - Glen Reid

Okay and yeah, also if -- that's great; that's helpful. If you could also comment on what you think looking ahead.

A - Amy Miles

Yeah, I think going forward to '06, you would expect that historical increase in ticket prices of 3$ to 4%; again that being primarily increase. And then with respect to the concessions, we would again expect in the first quarter to have the benefit of our concessions program change; because we don't cycle through that until we get to the second quarter of 2006. Then hopefully what you will see the balance of the year, again, it will be minimal price increases; but hopefully a benefit from very strong concession film product for the balance of the year. But nothing -- we would not expect it to be anything like that 6% to 7% for the second through the fourth quarter.

A - Michael Campbell

Amy touched on, I think, another important subject that maybe we can spend just a minute on that is the film product. This past year in 2005, we only had a couple of the CGI, computer-generated, animated films which are typically very, very strong in family and concession business. Looking forward into 2006, I believe there are about eight of those films this year, including some very high-profile releases like Cars, which was delayed and pushed forward from 2005 into 2006, and a number of other titles. So I think that in and of itself is good for concession sales. Regarding National CineMedia, I think clearly we believe we have a very valuable asset there. We believe it grows more valuable as we bring on these founding partners. But currently, we are focusing on getting Cinemark integrated and focusing on streamlining the operation, generating the efficiencies that come with bringing this type of business together. But it's not lost on us that we have, we believe, a great asset there that could offer incremental value to shareholders at some point in time.

Q - Glen Reid

Okay. Thank you.

Operator

Our next question is coming from Mr. Gordon Hodge with Thomas Weisel Partners. Please state your question.

Q - Gordon Hodge

Yes, good morning. If you could, Mike, I think you had mentioned as it related to National CineMedia that you might have some purchasing power as it related to digital cinema. I am just curious; does that suggest a more aggressive rollout for Regal of digital projectors? Not the protectors you have for advertising, but also for full motion picture films. And then, would that all be run through NCM? Or is that something you would participate in the other financing vehicles that seem to be out there in your press release?

A - Michael Campbell

Okay, ultimately, Gordon, I mean it will be Regal's decision, just as it is AMC and Cinemark's decision, as to where to go down the path on digital deployment. However, we have all chosen to use NCM as a vehicle because we believe there are certain efficiencies that can be generated there. And Kurt and his group are currently engaged in various negotiations, but we do believe that there could be some purchasing power there if we can obviously aggregate purchases for AMC, Cinemark, and Regal, and other smaller exhibitors if they want to join the program. We also believe that this could be some upside for the studios as well, because by combining through NCM we believe we can actually save the studios money as well in our program. But we are currently evaluating different technologies. I think there remains to be some beta testing that needs to be done on different 2K systems as well as some of the 4K systems. And regarding our timing for converting to digital, my personal opinion is I don't know that there is any huge advantage for us being a first mover and encountering some of the problems that you sometimes get as a first mover, with working out the bugs and different technological issues. Nor do I think we're going to probably be lagging the pack. But I think a good beta testing period and having us be somewhere in the middle of the pack as it regards timing on the rollout is a good outcome for us.

Q - Gordon Hodge

Okay, great. And then question, just a follow-up. Amy, I think you talked about the NCM numbers. And just curious, you reported the, I guess – what -- how should we think about the total revenues that NCM generated? I guess, looking at the 31.7 that you recognized; and then the 9.9 is net; so if we looked at the total gross revenues, just to get a sense for the scope of the business, is that something you can disclose?

A - Amy Miles

Yes, I would be glad to. If the 31 -- if you kind of bifurcate the 31.

A - Amy Miles

Just to be clear, $2 million of that is in admissions revenue.

Q - Gordon Hodge

Okay.

A - Amy Miles

$29.7 million of that is in other revenues.

A - Amy Miles

And if I were to adjust for the accounting difference, which is your question, and gross up the revenues.

Q - Gordon Hodge

Yeah.

A - Amy Miles

What I would, what you would see is $37.5 million of total revenues.

Q - Gordon Hodge

37.5 -- okay.

A - Amy Miles

That is compared to 30 for the prior year.

Q - Gordon Hodge

Versus, I'm sorry, what?

A - Amy Miles

30 million for the prior year.

Q - Gordon Hodge

Terrific thank you.

Operator

Our next question is coming from Mr. Michael McCaffrey with North Sound Capital.

Q - Carl Gardner

Hi, it's actually Carl Gardner. A follow-up to the -- on working cap; aside from kind of the quarterly differences. But if you just look for the full 12 months, this year you generated $88 million in working cap benefit; $50 million last year. So it's almost a third of free cash flow.

A - Amy Miles

Yeah.

Q - Carl Gardner

Coming from working cap benefit this year. Should we continue to expect working cap benefits kind of year after year, as we think of free cash flow power going forward?

A - Amy Miles

Yes, I always try to be a little bit more conservative when we model that. But to continue to have -- I mean you are going to continue to have that interest accrual, you're going to continue to have the timing in the tax payment, as well as with the accrual in AP. So from that perspective, somewhere between those two years is an appropriate modeling.

Q - Carl Gardner

Okay, good, thank you.

Operator

Your next question is coming from Mr. Tuna Amobi with Standard & Poor's. Please state your question.

Q - Tuna Amobi

Thank you very much for taking the question. I have one question for Mike and one for Amy. And Mike, my question is related to your earlier comments on the window issue. I would agree that it seems like the media is somewhat over focused on that. But at the same time, on the other hand, if you look at -- if I take your stats that you mentioned, the average six day decline per year, and project that out, it would suggest that it would take 21 years for the current window to collapse completely. Which I would argue is much longer than a lot of pundits would expect, particularly given the current state of the digital revolution and so on. So if -- my question is, what is the backup plan for the current trends in the digital area? And how this might ultimately affect the business model of companies such as yours? And I realize you're doing stuff in the digital area; but I think that is not – that’s a little bit different from what we're talking about here. And my question to Amy is related to NCM. I think that I was looking to understand how the governance -- current governance structure, the ownership structure, would evolve, particularly after Cinemark joins. And given the current reporting structure that you have right now, which is to include the net amount in other revenues, my question is, what is the reason for this presentation as opposed to reporting this as an equity affiliate? And how would this current presentation that you just started in 2006 evolve as other NCM partners join this venture? Thank you very much.

A - Amy Miles

Okay, I will go ahead and go first. With respect to governance, there is an economic ownership and a voting control. Economically, right now, we have 63% of the benefit of National CineMedia; and AMC would have 37%. Going forward, when Cinemark joins, our economic interest will decline to right around 50%, and AMC right around 30% and Cinemark right around 20%. As far as the voting or governance question, we have a third of the vote; AMC has a third of the vote; and Cinemark has a third of the vote. So the governance is shared and the economic is based more on the economic contribution to the business, which is based on primarily on attendance. As far as the presentation of our net advertising revenues, as the advertising business has always been a core piece of the theater business -- and you can see that throughout the industry if you go back 10 to 15 years -- a net presentation, when you kind of effectively outsource your advertising, is the correct accounting for the revenues that will be generated from National CineMedia. There is just a change between this year and last year that are primarily driven by contractual differences. I.e., today the contracts for advertising are mile going forward the contracts for advertising will be National CineMedia. And there should be -- if we continue to add affiliates and continue to grow the business that should not change the accounting.

Q - Tuna Amobi

So effectively you are consolidating as opposed to reporting as an equity affiliate. Am I correct in that interpretation?

A - Amy Miles

No, we're not a consolidating. What happens is National CineMedia has the revenue on their books for the advertising. They have the associated expenses on their books for creating that advertising -- or for showing that advertising. That results in a net EBITDA number that they then distribute to the exhibitors as payment for the advertising space.

Q - Tuna Amobi

Okay, thank you.

A - Amy Miles

The payment for the advertising space is in other revenues.

Q - Tuna Amobi

Thank you.

A - Michael Campbell

Okay, then regarding the windows, I think the math that you did is probably correct, but I think the underlying assumption is somewhat questionable. And that is, the six-day decline every year is -- I mean this past year is not typical of what you can expect going forward in my opinion. And I think here is the following reason. Let's say 10 to 12 years ago the average window, DVD from theater, was about six months. What has occurred during that period of time though is that because of Megaplexing, because of the type of theaters we have, the number of screens that are released is released on initially; we have as theater owners dramatically condensed the time in which we generate our portion of the revenue. Example being this past year, if you look at the biggest picture of the year, the Star Wars picture, we generated between 80% and 90% of our slice of the revenue the first four weeks of the release. So as an exhibitor we would certainly like to see six-month windows. But from a practical standpoint, I think we could have expected windows to continue compacting a bit, because we generate our revenue so much quicker. 10 years ago it might've taken us 10 to 12 weeks to generate that same percentage of revenue. So I don't think the window necessarily continues collapsing as it has in the past. That being said, too, I don't sense that any of the major studios, based on our discussion with them, believes that day and date release is advantageous for them or even works; because theatrical exposure has always and I think continues to drive the downstream demand, in addition to being a huge revenue generator in and of its own right. So studios have historically tried to add different streams of revenue to the pipeline, not diminish revenue streams by replacing one with the other. So we believe the whole window collapse issue is overblown. As it relates to how we react to it in the future, certainly if the theatrical window declines to a point where we believe that it really impacts our business, we will act accordingly at that point in time.

Q - Tuna Amobi

Okay and that's very helpful, and yes then. Just a quick follow-up; if you assume that, first of all, the premise that the attendance is in a secular decline, I guess you would agree with that, right?

A - Michael Campbell

No, I don't think so. I mean, we don't believe that the attendance decline is necessarily secular. In fact if you look back over the last 30 years, there have been comparable periods where you had multi-year declines in attendance followed by a rebound, which would indicate that it is more of a cyclical issue, not secular. That being said, what we did say earlier is we're not oblivious to the technological issues that surround our business, including shorter windows, including better home systems and different factors around our business. But we believe those to be minor factors, not the major cause in the attendance decline.

Q - Tuna Amobi

Thanks a lot.

Operator

Our next question is coming from Mr. Jeff Logsdon with Harris Nesbitt. Please state your question.

Q - Jeffrey Logsdon

Anything changing on the cost side of the equation this next year -- energy costs, insurance costs, vendor costs? Any vendor contracts coming up for renewal this next year?

A - Amy Miles

Jeff, not kind of materially, I mean, I guess obviously energy cost, you see some increases there with respect to I mean, natural gas. So you could see some increase in energy costs. I wouldn't think that -- I'm not trying to say that that is material. But when you are looking at our overall cost structure, our utilities represent anywhere from, say, $30 million to $35 million. So that is the cost that I would be talking about increasing. And then the rest of the increases should really be no more than inflationary for this fiscal year, there is no upcoming changes or any kind of trends that would need to be thought of from a modeling perspective.

Q - Jeffrey Logsdon

Secondly, I know this is a long way out, but as you think about the digital cinema initiative and kind of the current plans that are floated around in terms of financing, what happens at the end of the theoretical 10-year period? How do you guys balance kind of the 2K versus 4K, 4K not being really as utilizable on as bigger screens as you have in a lot of your theaters? Can you give us some of the dynamics around your thinking on some of this?

A - Michael Campbell

Yeah, regarding the 2K and the 4K, that’s one reason that I said earlier we don't know that we necessarily want to be a first mover. Nor do we want to bring up the rear of the pack; but I think somewhere in the middle there we will have adequate time to vet the 4K versus 2K.In addition, I think the manufacturers of 4K over the next to three to six months have indicated that they will have a capability of projecting 4K on screens as large as 60 to 70 feet, up from the current 35 to 40 feet. That still remains to be seen whether that happens or not. But that is all the more reason I think for us to be patient during the beta testing process. As far as the financing, I don't know if your question is what happens to the ownership of the equipment after 10 years, or what happens to the life of the equipment.

Q - Jeffrey Logsdon

I guess I was just wondering, at the end of 10 years, are you then going to have to go out, and the studios are done with their payments into the virtual print pool; and then you are at the end of that period. So I mean you either purchase the equipment you have; or purchase new equipment; or go to 8K or 12, 16K, whatever is available at that point in time?

A - Michael Campbell

Okay, I think clearly the type of financing plan that we would envision signing onto or putting together through NCM would certainly address such issues as warranty and maintenance reserve. That is another advantage I think of us dealing in bulk, to try to get some of these issues resolved. As far as 8K or 16K, the human eye can only resolve down to about 3,000 lines of resolution. So we believe that it's either 2K or 4K; and I am not sure that any further improvement in resolution would be apparent on the screen for a consumer. So we are not as concerned about that.

Q - Jeffrey Logsdon

Okay, great. Thank you.

Operator

Ladies and gentlemen, we have reached our allotted time for questions and answers. I will now like to turn the conference back to your host.

Don De Laria - Regal Entertainment Group - VP IR

We appreciate you turning in for our latest quarterly call, and we will be doing it again in a few months. Everyone have a good day. Thank you.

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Source: Regal Entertainment Group Q4 2005 Earnings Conference Call Transcript (RGC)
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