Carmike Cinemas Q4 2007 Earnings Call Transcript

Carmike Cinemas, Inc. (CKEC)

Q4 2007 Earnings Call

March 17, 2008 5:00 pm ET

Executives

Nicki Sacks - ICR

Michael W. Patrick - Chairman of the Board, President, Chief Executive Officer

Fred W. Van Noy - Chief Operating Officer, Senior Vice President, Director

Richard B. Hare - Chief Financial Officer, Senior Vice President - Finance, Treasurer

Analysts

Jeff Logsdon - BMO Capital Markets

Presentation

Operator

Good day, everyone and welcome to the Carmike Cinemas Incorporated fourth quarter 2007 conference call. As a reminder, this call is being recorded. It is now my pleasure to turn the floor over to your host, Ms. Nicki Sacks with ICR. Please go ahead, Madam.

Nicki Sacks

Thank you. Good evening. This is Nicki Sacks with ICR. Before we begin, let me remind you in accordance with the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, the company knows certain measures to be discussed during this call may constitute forward-looking statements. Such statements are subject to risks, uncertainties, and other factors that may cause the actual performance of Carmike to be materially different from the performance indicated or implied by such statements. Such risks and factors are set forth in the company’s annual report on Form 10-K for the year ended December 31, 2007.

I would now like to turn the call over to Michael Patrick, Carmike Cinema’s Chairman, CEO, and President. Michael.

Michael W. Patrick

Thank you. With me I have Richard Hare, our Chief Financial Officer, and Fred Van Noy, our Chief Operating Officer. We would like to welcome you to our fourth quarter earnings conference call.

On today’s call, we would like to address the fourth quarter box office performance, the completion of our digital rollout, the pricing opportunity in our box office and concession stands, specific 3D performance, as well as some recent financial and early 2000 box office performance results.

The fourth quarter got off to a very slow start with a weak release schedule in the month of October, which was compounded by poor holdovers from the third quarter. Expectations into November were fairly optimistic with a few movies hitting expectations but there was little support from the second tier product that would allow us to regain our box office momentum.

Positive traction began, however, in mid-November with the 3D release of Beowulf. The return of more mainstream commercial films around the holidays drove improved box office performance in December with momentum carrying into January and February. Our top performing films in the quarter included Alvin and the Chipmunks, National Treasure, I Am Legend, and Beowulf 3D.

On a per screen basis, our attendance was down during the quarter by approximately 8.9%. I would like to point out that according to some industry reports, Beowulf 3D represented approximately 28% of the weekend national box office. However, Carmike's Beowulf 3D [play dates] opening weekend accounted for almost 35% of our box office.

As a reminder, we have typically implemented a $2 service charge for 3D but for this picture, we tested a $2.50 service charge in several locations to test the ability to move this fee to a higher range. We did not experience any major push-backs from our customer base on this test.

In addition to the 3D fee, we also continued a very aggressive across the board ticket and concession price increase, allowing us to report a 9.2% increase in average ticket price and a 5.9% average per cap increase on our concession and other category for the quarter.

Along with our price increases, we also established our Hannah Montana advanced ticket sales program soon after the opening of Beowulf in preparation for the Christmas holiday season, as we believed these tickets would be great stocking stuffers. Since this was a concert and not a movie, and in 3D, not 2D, Carmike experimented with a new pricing policy of all seats, one price -- $15 advanced tickets and $18 at the door. In a few minutes, Fred will give you some more highlights on the Hannah Montana event.

As other circuits continue to negotiate and/or test digital technology and 3D, we are happy to report that we have completed our digital and 3D installations prior to the opening of Beowulf. With this retooling cost behind us, we are now in position to capitalize on this investment with events such as the Hannah Montana phenomena and upcoming movies such as Journey to the Center of the Earth 3D, exclusively playing in 3D, and a number of other major events announced in the near future. We now operate 2,174 digital projectors in 194 locations with 429 3D systems. Although we have completed our initial plans for 3D installations, we do have an option to add an additional 100 screens, which we plan to utilize in the near future.

December’s box office performance, along with our surplus property sales generated in the fourth quarter gave us the ability to prepay $15 million of bank debt in December. With LIBOR resetting at current levels in the first quarter, we should also see a reduction in interest costs of approximately $6 million over the next 12 months.

With the success of the December box office and without any event picture in January, we were able to carry the holiday season momentum throughout January and February, providing very positive results coming into 2008. The results of these two months prove that having product that appeals to the general audience will stimulate results we’d like to see from our industry.

Carmike saw a 25% increase in box office revenue for the month of January. February of course performed even better for Carmike with our high 3D screen count on Hannah Montana. So far, March has been disappointing as comparisons to last year’s success of Wild Hogs and 300 in 2007.

Industry analysts talk about the difficult comps for May and early June against movies such as Spider-man 3, Shrek 3, and Pirates 3, but we have Chronicles of Narnia 2, Indiana Jones and The Kingdom of the Crystal Skull, Sex and The City, followed by Dreamworks’ animated movie, Kung Fu Panda. Also, we have a new improved version of The Incredible Hulk and Mike Myers in The Love Guru, and we will end the month with Pixar’s Wall-E.

Rounding out the summer, we have Will Smith in Hancock, Eddie Murphy in Meet Dave, Brandon Fraser in Journey to the Center of the Earth 3D, and the new Batman: The Dark Knight.

Toward the end of this year, we have movies such as High School Musical 3, Madagascar 2: The Crate Escape, the new James Bond feature, Disney’s 3D animated film, Bolt, and a new Harry Potter film, which we believe could give this year’s fourth quarter a true advantage over the fourth quarter of last year.

Compared to what we experienced in 2007, we believe the release pattern seems to be spread out more evenly through this year rather than targeted only at the summer season.

Now I’d like to turn the call over to Fred.

Fred W. Van Noy

Thank you, Michael and good afternoon, everyone. I would like to begin by reviewing our pricing policy, which had a strong positive impact on our fourth quarter revenue. Knowing that our ticket and concession price increases were planned in November, we felt the effective date should coincide with the opening of Beowulf 3D.

Because of our technological advantage with 3D, we were convinced that a more aggressive approach to our pricing structure would be acceptable to our audience. In many of our locations, we instituted a $0.50 per ticket increase on November the 16th, along with a $2 surcharge for 3D on Beowulf. As a test on the reaction of our customers to our 3D surcharge, we selected a handful of locations in our larger markets and pushed the additional surcharge to $2.50.

We found no meaningful negative reaction to the additional $0.50 increase, giving us the confidence that we can continue to escalate this additional charge to higher levels in the future.

We also increased our concession prices across the board on November the 16th with a range of $0.05 to $0.25 per item within the menu selection. These increases, along with our 3D surcharge, allowed us to enjoy an average ticket increase over the same quarter of last year of 9.2% and an average concession per cap increase of 5.9%.

I would now like to give you a little color on our Beowulf 3D performance. We played Beowulf 3D in 191 of our locations, or 78% of our first run theaters. We also played Beowulf in 2D in 40 locations, some locations playing side-by-side with 3D and other locations playing exclusively 2D. Overall, our 3D locations generated almost 91% of our circuit’s box office gross on Beowulf.

In the theaters that we gave the customer a choice of viewing Beowulf in 3D or 2D, we found a range of a high of 92% selecting 3D to a low of 69% in selective polling of our theaters. One of the most interesting facts that I personally saw over the opening weekend in the locations that I visited was that the choice to see Beowulf in 2D was more generation motivated and not pricing.

Additional 3D product that did not get much national attention but contributed well to our revenue was Nightmare Before Christmas, which on opening weekend of October the 22nd was our third highest grossing film, providing 15% of our total week’s box office gross for the circuit. If you’ll recall, this feature was offered in 3D only, a concept we expect you’ll be seeing more of in the near future.

Another contributor to our 3D program, as well as incremental revenue to our quarter, was the National Geographic documentary, Sea Monsters 3D. This film ranked 11th in our week ending October the 11th for all films played at the box office and contributed somewhat to our average ticket price increase with the $2 service charge.

Although this content did not attract the attention of a top 10 national box office movie, it does show us that alternative content can be a contributing factor in weeks when traditional movies are not performing in slower months of the year.

As mentioned in our last conference call, in partnership with Disney, we tested a live broadcast of the West Virginia versus Louisville football game at our theater in Morgan Town, West Virginia. Although this game was played in Morgan Town, we were able to sell out three auditoriums with a one price ticket of $10 per person. Audience reaction was great. Disney and representatives of the NCAA were very impressed with the quality of the presentation and the audience experience. We have since tested an NCAA Texas versus Texas A&M basketball game at five locations in Texas with positive results and we hope that this concept will grow into something more meaningful in the future.

Sea Monsters 3D, Nightmare Before Christmas 3D, and Beowulf 3D all helped in our planning for Hannah Montana. Soon after the opening of Beowulf, we implemented our pre-sell ticket program for Hannah Montana. We sold an unprecedented amount of tickets for this event and it allowed us to realize very early in this period that we had something big here.

Going into the program, a $15 price per ticket was established but early results on our pre-sells indicated no push-back on the price, so we decided to treat this event as any other typical concert; $15 for advanced sales, $18 at the door. This strategy clearly demonstrates based on the success of this event that pricing is flexible and can be adjusted based on demand, something not easily acceptable with traditional movie content.

Hannah played in 190 locations for Carmike and generated over 62% of our box office total for the opening week. Hannah alone out-grossed Carmike's entire box office for the same week in 2007 by 167%. Our concession sales for the first week of Hannah were over 193% of the same week last year. These results were achieved during a period of time that is normally one of the slowest weekends in our industry due to the Super Bowl.

Approximately 62% of our first week’s attendance on Hannah came from pre-sells, or at the $15 level, and 38% came from the day of sales or at the $18 rate. Hannah Montana clearly demonstrates to the industry the potential of 3D technology, alternative content, and most importantly pricing flexibility. We are convinced the door of opportunity is now completely open.

Producers, directors, and distributors are excited and motivated to take this technology to the next level. The upcoming 3D releases for the next two years are now tracking to about 21 films. We have five including the Hannah Montana in 2008. We’ve got 10 booked for 2009 and six already tracking for 2010.

Moving on to our operations plan for 2008, we are planning another price increase in late April/early May timeframe in both box office and concession. This increase will probably not be as aggressive as our last increase in November but we will look at our opportunities on a market by market basis.

We plan to close 13 theaters in 2008 due to natural lease expirations. The average screen count for this group is a little over five screens per location and as a group, these locations had a negative cash flow of approximately $150,000 in 2007. Of these 13 locations, six are discount theaters.

In 2007, we had approximately $8 million in property sales. We currently have a number of closed C properties under contract and at this moment expect to monetize several properties this year. We are still expecting to open four new theaters with 42 screens in 2008 but all four will be in the latter part of the fourth quarter, depending on the weather conditions.

We are also expecting to open a minimum of seven new theaters in 2009 with 86 screens at this point. All of these locations are [build to suit] projects with minimal CapEx requirements on our part.

I’d like to now turn the call over to Richard.

Richard B. Hare

Thank you, Fred and good afternoon. On today’s call, I will provide highlights for the fourth quarter and the year ended December 31, 2007, and discuss our current debt structure and liquidity. I will also explain the nature of several non-cash charges the company incurred during the fourth quarter. During the fourth quarter, total revenue decreased to $116.8 million from $121.1 million in the prior year period. Admission revenue was $78.2 million versus $80.3 million in the prior year period and concession and other revenue decreased to $38.6 million compared to $40.8 million.

As of the end of the year, Carmike had 264 theaters and 2,349 screens. In the quarter, we opened two and closed eight smaller theaters, which increased our average screen per theater to 8.8.

Box office revenue per screen was up over half a percent during the quarter as the 9.2% improvement we realized in our average ticket price was largely offset by the 8.9% decline in our attendance on a per screen basis.

As previously mentioned, we implemented a company-wide box office and concession price increase in November, which drove our average ticket price to $6.19 from $5.67 from the prior year period, and improved our concession sales [and other patron] by 5.9% to $3.06 for the quarter compared to $2.89 in last year’s period.

Film exhibition cost was 54.9% of admissions revenue and our concession cost was 10% of concession and other revenue. Theater operating cost increased $200,000 to $47.6 million in the fourth quarter of ’07 due to several factors, including slightly higher salary expense.

Theater level cash flow decreased to $22.4 million in the current year period compared to $26.3 million in the period a year ago. Theater level cash flow is defined as operating income before general and administrative expenses, depreciation and amortization expenses, gain on sale of property and equipment, as well as non-cash charges.

General and administrative expenses were down $1.5 million during the quarter to $5 million, primarily the result of reduced professional fees in non-cash deferred comp compared to the prior year period.

Our operating loss for the quarter was $56.3 million compared to operating income of $3.4 million in the prior period last year. Interest expense was down $400,000 to $12.3 million from the prior year period due to lower interest rates on our outstanding debt and a reduction in principle.

During the fourth quarter, the company recognized a non-cash charge of $26.1 million primarily related to impairments on certain theaters. This charge impacted 31 theaters in our portfolio, of which over a third were discount theaters. Carmike evaluates theaters for impairment in accordance with FAS-144.

In addition during the quarter ended December 31, 2007, Carmike recognized a non-cash charge to fully impair the company’s good will of $38.2 million, largely due to the recent decline in the company’s share price. Carmike's carrying value including good will was found to exceed the fair value of the company. As a result, we took a full impairment of the company’s good will.

You will also notice that we have shown the results of our discontinued operations separately on our income statements for 2007, 2006, and 2005. The company closed 18, 12, and 10 theaters in certain markets in these years respectively and has reported the results of their operation, including gains and losses on disposal as discontinued operations in our consolidated statements and operations for each period presented.

Total revenue for the year ended December 31, 2007, was $489.3 million, a $3.5 million improvement over the prior year. We reported a $25.2 million operating loss for ’07 versus operating income of $25.7 million in the previous year. Our net loss for 2007 was $126.9 million compared to a net loss of 19.4 in 2006.

The year-end results for 2007 were also impacted by the second quarter non-cash charge associated with financial accounting standard number 109, accounting for income taxes. The company was required to recognize a non-cash accounting charge to establish a full allowance against our deferred tax asset in the second quarter. Accordingly, our income tax expense for the year was $55.8 million, and this charge has no impact on the cash flows or liquidity of the business.

Capital expenditures for the year were approximately $22.7 million, primarily for maintenance, the installation of our new digital program, and one new theater.

Our cash needs on a going forward basis remain modest. In 2008, we anticipate our CapEx levels to be approximately $18 million, which is below our 2007 expenditure level. As we mentioned, we completed our digital rollout in Q4 of ’07.

As of December 31, 2007, Carmike's cash and cash equivalent balance was $22 million and the company had total debt outstanding, which includes long-term debt and capital leased and long-term financing obligations of $421.7 million. The company’s current debt structure, excluding capital leases and financing obligations, consists primarily of our borrowings under our existing credit agreement, as amended.

As of the end of December 31, 2007, we had $162.9 million of borrowings under our term loan and $138.7 million of borrowings under the delayed draw facility, and we had no borrowings under our $50 million revolving credit facility.

As previously mentioned, the company prepaid $15 million of our term loan during the fourth quarter of 2007. Also, as Mike previously mentioned, as our three-month LIBOR borrowings renew on our bank debt in the first quarter of 2008, we will benefit from the reduced interest costs on a going forward basis.

We remain in compliance with the provisions of our bank debt. Our leverage ratio of consolidated debt to adjusted EBITDA is approximately 4.1 times, which is below the required ratio of 4.75 times.

As a reminder, under the terms of our credit agreement, the consolidated debt excludes long-term financing obligations of approximately $85 million. Our adjusted EBITDA to consolidated interest coverage ratio is approximately 1.9 times, which is above the required 1.65 times.

Our EBITDA is adjusted upward for non-cash compensation expense, as well as the aforementioned other non-cash charges related to good will and asset impairment, among other items.

Our capital spending for the year was well below the $30 million annual limit.

During the fourth quarter, the company announced an operating performance improvement plan. The objectives of this plan are to maximize cash flows from existing screens by improving our per screen metrics and maintaining focus on managing costs, optimizing our theater portfolio by closing or selling under-performing theaters and monetized assets via sales leaseback transactions, and to continue to decrease our financial leverage.

Mike and Fred just gave you an update on some of the key elements of this plan, including the company’s pricing initiatives and the sale of under-performing assets.

With regard to a potential sales leaseback transaction, we continue to discuss this option with various investors, including Reed’s. However, in light of challenging financial markets, it’s difficult to predict the timing of such a transaction.

Please note that in addition to the company’s earnings announcement today, the company issued an additional press release this afternoon indicating that our board of directors has declared a $0.175 per share dividend for the first quarter of 2008 to all shareholders of record on April 2, 2008 to be paid on May 4, 2008.

In closing, while the box office in the fourth quarter was challenging, the company monetized excess properties and prepaid some of its debt. Carmike and the industry have seen a promising start to 2008. We will remain focused on implementing our operating performance plan and leveraging our leading position in 3D to generate additional cash flow for our company and enhance shareholder value.

We thank you for listening to our call today. Operator, we would like to open the call up for questions at this time.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Jeff Logsdon.

Jeff Logsdon - BMO Capital Markets

Thank you. Richard, the bank debt, is this -- the original agents and proprietors of that was Bear Stearns. Is there any change that’s gone on or where does most of the debt sit? Who is the bank group that’s involved?

Richard B. Hare

Currently we have a $50 million untapped revolving credit facility. Bear Stearns is the agent for that but they do not hold a majority of that paper. That is spread out among several different investors.

With regard to the $300 million of term debt that we have, that is parceled out to many different investors and Bear Stearns doesn’t hold that paper.

Jeff Logsdon - BMO Capital Markets

Great. Thanks.

Operator

(Operator Instructions) We have a question from Chris Mittleman from Mittleman -- (Operator Instructions) And that concludes today’s question-and-answer session. Thank you all for joining us. Mr. Patrick, I’ll turn the call back over to you for any additional or closing remarks.

Michael W. Patrick

Well, I appreciate you all for calling in on this call and we will host our next call next quarter. Thank you very much.

Operator

Once again, thank you all for joining us. That does conclude the presentation. Have a great day.

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