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Regal Entertainment Group (NYSE:RGC)

Q2 2012 Earnings Call

July 26, 2012 4:30 pm ET

Executives

Amy E. Miles - Chief Executive Officer and Director

David H. Ownby - Chief Financial Officer, Executive Vice President, Principal Accounting Officer and Treasurer

Analysts

Benjamin Mogil - Stifel, Nicolaus & Co., Inc., Research Division

Eric O. Handler - MKM Partners LLC, Research Division

Bo Tang - Barclays Capital, Research Division

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

Townsend Buckles - JP Morgan Chase & Co, Research Division

James M. Marsh - Piper Jaffray Companies, Research Division

Tuna N. Amobi - S&P Equity Research

Bishop Cheen - Wells Fargo Securities, LLC, Research Division

David W. Miller - Caris & Company, Inc., Research Division

Robert Fishman - Nomura Securities Co. Ltd., Research Division

Benjamin Swinburne - Morgan Stanley, Research Division

Matthew J. Harrigan - Wunderlich Securities Inc., Research Division

James C. Goss - Barrington Research Associates, Inc., Research Division

Operator

Good afternoon. My name is Luis, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regal Entertainment Group Fiscal Second Quarter 2012 Earnings Release Conference Call, with our hosts, Amy Miles, Chief Executive Officer of Regal Entertainment Group; and David Ownby, Chief Financial Officer of Regal Entertainment Group. [Operator Instructions]

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. The 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 27, 2012. All forward-looking statements are expressly qualified in their entirety by such factors.

Now I will turn the call over to Amy Miles.

Amy E. Miles

Good afternoon, and thank you for dialing into our second quarter conference call. We're here this afternoon to discuss our second quarter financial results with the investment community and intend to conduct our call in a normal fashion. But our thoughts today remain with those affected by the horrific event that transpired in Colorado last Thursday night. We understand that investors have questions about how those events may impact our future operations. We'll do our best today to answer those questions in a respectful matter and with the understanding that some of those questions can only be answered with the passage of time.

We strongly believe that movie theaters have always been, and will continue to be, places where friends, families and communities can safely gather together for a few hours of fun and entertainment, and we remain committed to providing a safe and secure environment for our guests. We were heartbroken by the senseless act that took place last week. And on behalf of everyone here at Regal Entertainment Group, we extend our deepest sympathy to the victims, their families and the Aurora community.

With that in mind, for the next few minutes, I will provide an overview of second quarter results for both the industry and Regal and update on several strategic initiatives. And following my remarks, David will highlight our financial results and always, we'll conclude the call with a question-and-answer session.

We're extremely pleased with the box office momentum generated in the first quarter, carried over into the start of the summer movie season. The success of The Hunger Games in April and Marvel's The Avengers in early May helped drive second quarter industry box office over the $2.8 billion mark for the third time in the last 4 years, a decline of only 3% as compared to last year's record second quarter.

In a historical context, this quarter's box office was the third highest in the history of our industry.

Premium format films were a key driver of the quarter's box office revenue, as nine of the quarter's top 10 films were presented in either IMAX or 3D. Based on our review of industry sources, we estimate that over 20% of second quarter industry box office revenue was generated through premium ticket sales, a significant increase as compared to the same period last year.

As was the case in the first quarter, we again want to point out the continued long-term stability of the domestic box office. Despite the slight decline in the second quarter, industry box office revenue for the trailing 4 quarters just ended totaled approximately $10.5 billion. Our industry has always experienced, and will likely continue to experience, short-term quarterly fluctuations in box office revenue, primarily related to the commercial appeal of the content available in any given period. Recent quarters are no exception. But against that backdrop of quarterly ups and downs, the long-term box office has remained remarkably consistent, falling below the $10 billion mark for a trailing 4-quarter period only once since early 2009. We believe that the long-term stability of the box office is an aspect of our business that is often overlooked by the investment community.

From an operational standpoint, our sales personnel once again demonstrated their ability to provide a great customer experience, while at the same time keeping a close watch on our variable costs. The attention to details -- their attention to detail, combined with the healthy industry box office results, helped us achieve an adjusted EBITDA margin of just under 21% for the first half of this year. That's our highest in 8 years.

David will provide more financial detail behind our operating results later, but I think it goes without saying we are extremely pleased with our recent operational execution.

We're also pleased with the results of several ongoing strategic initiatives during the quarter. Our conversion to digital cinema is nearing completion. At the end of the second quarter, over 5,800 of our screens were equipped with digital projection systems, and over 80% of our buildings were fully digital.

In addition to the operating and content management efficiencies we are experiencing as a result of the digital conversion, we continue to believe that acquisition opportunities will be created as more and more digital systems are deployed industry-wide. By the end of this year, we estimate that over 75% of domestic industry screens will have been converted to digital, and that major studios will begin to plan for the eventual end of 35-millimeter prints.

We believe that these factors, combined with a healthy box office environment, continue to provide a good backdrop for M&A activity. We made significant progress in our effort to offer a premium viewing experience to a larger portion of our customer base. We added 2 IMAX screens and 9 RPX screens during our second quarter. We continue to see incremental revenue and returns from our premium auditoriums and fully expect to continue our IMAX and RPX rollout into 2013.

Our concession programs continue to be a key driver of revenue and adjusted EBITDA margins. Our expanded food menu is now available at over 40 locations, and for the fourth consecutive quarter, had a positive impact on our concession per caps. The success of the expanded food menu, combined with continued increases in demand for our core concession products, helped us achieve a second quarter concession per cap of $3.55, the highest quarterly total in the company's history.

And finally, our equity investments in both DCIP and Open Road Films had a positive impact on our earnings this quarter. We have a long history of creating shareholder value by prudently investing capital in complementary businesses and are extremely pleased that these ventures are already generating meaningful returns. We fully expect each of these strategic initiatives to have a positive impact on our operations and free cash flow in 2012 and into the future.

Now as we look to the film slate for the balance of the year, industry box office for the first 4 weeks of the third quarter increased approximately 6% versus the same period last year. While the July box office will ultimately account for a larger part of the quarter's results, the titles scheduled for release in August and September should appeal to a wide range of audiences and contribute to box office success as the summer movie season comes to a close.

And while last year's holiday box office season was disappointing, it provides a relatively easy comparison period for the upcoming fourth quarter, with a film slate that is anchored by James Bond in Skyfall, the final installment of the Twilight Saga and Part I of Peter Jackson's The Hobbit, we're optimistic about the potential for box office in late 2012.

In summary, we're again pleased with our operational execution during the first half of '12 and the resulting growth in adjusted EBITDA, and we remain optimistic regarding the potential for box office success over the balance of the fiscal year.

I'd now like to turn the presentation to David Ownby to discuss the company's financial performance.

David H. Ownby

Thanks, Amy, and good afternoon, everyone. Today, I'll provide a brief additional analysis of our second quarter results and an update with respect to our balance sheet and asset base.

For our fiscal second quarter, we generated total revenues of $723.3 million, including $494.7 million of box office revenue, $192.6 million of concession sales and $36 million of other operating revenue.

Our admissions revenue this quarter decreased 4.7% in the aggregate and 3.4% on a per screen basis as a result of an 8.5% decrease in attendance, combined with a 4.1% increase in our average ticket price. The increase in our average ticket price was driven by a 1.9% increase in our base 2D ticket price and by a significant increase in the portion of our box office revenue that was generated in our IMAX, RPX and RealD auditoriums.

Premium ticket sales overall accounted for just over 23% of our box office revenue during the second quarter, an increase of over 500 basis points as compared to the same period last year. Our concession revenue decreased by 3.8% in the aggregate but grew by 5.3% on a per attendee basis, resulting in the highest quarterly concession per cap in our history.

Similar to the first quarter, our concession per cap increase was largely driven by improvements in beverage and popcorn volume, but also benefited from the expanded food menu currently available at over 40 locations and a film slate that featured less R-rated, adult-oriented product.

Other operating revenues increased 6.5% as compared to the same period last year due to increases in both contractual revenues from National CineMedia and revenues from our vendor marketing programs.

Regardless of the box office environment, it is imperative that our management team and field personnel carefully manage our cost structure in order to maintain our operating margins. Given the second quarter box office environment, we were once again extremely pleased with our operational execution. Our film and advertising expense of $265.3 million represented 53.6% of admissions revenue, an increase of 100 basis points as compared to the same period last year.

A second quarter box office that relied primarily on a few high-grossing films as opposed to breadth was the primary driver of the increase. Despite the quarter-over-quarter increase, our film and advertising cost, as a percentage of admissions revenue, remained slightly below our historical second quarter average.

Our 86.5% concession margin remained relatively flat with the same period last year, as moderate increases in raw material and packaged good costs were offset by increases in our concession per caps and the amount of vendor marketing revenue recorded as a reduction of cost of concession.

Total rent expense of $95.3 million decreased 1.5% in the aggregate, primarily due to a decrease in contingent rent associated with our lower second quarter revenue and the decline in our screen count over the last 12 months. On a per screen basis, our rent expense was flat with the same quarter last year.

And as Amy mentioned earlier, our field personnel's focus on cost control continue to have a positive impact on our operating results. Total other operating expenses of $184 million declined by 3.2% in the aggregate and 1.8% on a per screen basis as compared to the second quarter of last year. Reductions in theater level payroll costs in response to lower attendance levels had a decline in non-rent occupancy costs related to the reduction in our screen count were the primary components of the decrease and were partially offset by an increase in payments to IMAX and RealD associated with the increase in our premium ticket sales.

Once again, our field personnel's ability to control variable costs, while still delivering a great customer experience and a meaningful increase in our concession per caps, was a key driver of our success in the second quarter.

We are extremely pleased that our record concession per cap and our operational execution helped generate adjusted EBITDA and adjusted earnings per share that were both well ahead of consensus Wall Street estimates.

As for our asset base and our balance sheet, capital expenditures net of asset sales for the quarter totaled $23.5 million, and we continue to actively manage our asset base, closing 4 theaters with 35 screens to end the quarter with 519 theaters and 6,552 screens.

Based on our development schedule and outlook for the remainder of the year, we have slightly lowered our expectations for 2012 capital expenditures to between $95 million and $110 million.

In the back half of this year, we expect to open 6 to 8 theaters with 80 to 110 screens and close 6 to 8 theaters with 40 to 50 screens, which will result in ending counts of approximately 519 theaters and 6,602 screens for 2012.

As always, we encourage analysts and investors to model and evaluate our business on a per screen basis and want to emphasize that we expect our screen count to grow for the remainder of 2012.

With respect to the balance sheet, we ended the quarter with just over $325 million in cash and a total debt balance of just over $2 billion. The significant growth in our adjusted EBITDA in the first half of 2012 and the corresponding increase in our cash balance has had a positive impact on our leverage and debt covenant calculations. And as of the end of the quarter, our overall leverage ratio was 3.1x, and our leverage ratio, as defined by our senior credit facility, totaled approximately 2.1x, well below the covenant limit of 4x.

In closing, we are extremely pleased that the box office environment, combined with our operational execution, resulted in meaningful adjusted EBITDA growth for the first half of 2012, and we remain optimistic regarding the potential for box office success for the remainder of the year.

This concludes our prepared remarks, and we will now open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Ben Mogil with Stifel, Nicolaus.

Benjamin Mogil - Stifel, Nicolaus & Co., Inc., Research Division

So I just wanted to get a sense from what you guys are seeing over the last couple weeks in -- or last week in terms of sort of audience skittishness. I think, what, 20 minutes ago there was a poll that came out on Deadline that sort of talking about 1/4 of audiences are still sort of a little bit concerned about going to the theater. Can you talk about what you're seeing? Are you seeing sort of some demographics be more prevalent than others, maybe to just sort of -- I'll be interested in week one what kind of color you're seeing on that front?

Amy E. Miles

Ben, with respect to the study, I think it's a little premature for us to comment with respect to what impact that we're seeing in the theaters. We have several of the pictures that are performing quite well as we speak. But I think, really, at this perspective, it's probably better to wait to see how the next couple of weekends shake out before you can form any kind of meaningful opinion. Because every weekend, we're going to have different content in the theater so you're going to have that content variability. So I just think at this point in time, it will be really kind of premature to speculate, one way or the other, with respect to audience attendance over the next couple of -- of this week and the next couple of weeks.

Benjamin Mogil - Stifel, Nicolaus & Co., Inc., Research Division

Okay, that seems to be fair enough. David, a question for you. Sort of -- the $8.4 million sort of negative cost, i.e. gain in the quarter, was that all Open Road-related as well as some DCIP contribution?

David H. Ownby

It's about half and half, Ben. About 1/2 of that is DCIP and about 1/2 is Open Road.

Benjamin Mogil - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And if we kind of look forward, I think you've talked before the second half of the year, will that make turn sort of reverse itself for Open Road as they sort of ramp up some P&A around some films? Is that fair?

David H. Ownby

Yes, obviously, Open Road's results are very tied to their release schedule. In the second quarter, they didn't have any -- they had one film actually that was released theatrically, and that was a service deal for them so it didn't have a major impact on our financials. The only other big event they had in Q2 was the DVD release of The Grey, which went very well. As we get into the back half of the year for Open Road, they have 4 films scheduled for theatrical release, one each in August, September, October and November. And they will be incurring some P&A costs for those. So as we've talked about many times before, their results -- until they get a couple of years under their belt, their results will continue to be choppy.

Benjamin Mogil - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then on the CapEx front, the reduction, are you seeing developers be more cautious on theater growth? Or are you seeing just things shift into next year just sort of -- it's not a huge guide down, but just curious what you're seeing.

David H. Ownby

Ben, as far as the theaters that we have scheduled to open this year, those are all still on schedule. Just some of the actual capital expenditures around that and around our maintenance CapEx really lowers what's moving around some. So we still think we're going to get those 6 to 8 theaters open this year. That's what we had initially projected early this year.

Benjamin Mogil - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then last thing, and I'm sure someone else will ask the same thing, can you just give us the average ticket price for 2D, 3D and I guess, IMAX?

David H. Ownby

Sure. For the second quarter, our average ticket price for, I'll start at the top, IMAX was $15.81, 3D was $12.11 and the traditional 2D price, the base ticket price, was $8.41.

Operator

Our next question comes from the line of Eric Handler with MKM Partners.

Eric O. Handler - MKM Partners LLC, Research Division

With regard to additional security measures you might be taking in your theaters now, what type of financial impact that may be in terms of adding 1 or 2 incremental security people per theater? Or what in fact are you actually looking to do?

David H. Ownby

Eric, I think, again, it's probably a little bit premature for us to speculate on future changes to our security protocols. I mean, obviously, here in the short run, we want to do exactly what's right to make our customers feel safe and secure. And certainly, we always want to do that. But I think, again, at Amy's point earlier about the box office, it's just really premature for us to speculate on what kind of impact that might have on our go-forward financial results.

Eric O. Handler - MKM Partners LLC, Research Division

Okay. And then as a follow-up, so you're now sitting on nearly $200 million of excess cash, meaning your cash less than 1 full year of your dividends. Obviously, you want to have some dry powder for M&A and you just have a shelf offering several weeks back that gives you some debt flexibility. At what point does that start burning a hole in your pocket and maybe think about increasing the dividend a little bit?

David H. Ownby

Eric, we're still just going through exactly the same process that we always do. We're considering what options are out there, and we talk a lot about the activity in the M&A market, and we do continue to see deals in the marketplace and hear about other deals that may be coming to the marketplace in the near term. So we're going to do exactly what we always do, evaluate all those options and figure out what we think is the best use of that cash for our shareholders. And when we feel like we have the right information in front of us, we'll make those decisions.

Operator

Our next question comes from the line of Anthony DiClemente with Barclays.

Bo Tang - Barclays Capital, Research Division

This is actually Bo Tang in for Anthony. The first one I had is I was wondering if you could talk about what you're currently seeing in the M&A environment. You've mentioned before that you're starting to see more sellers coming off the sidelines, but we haven't really seen that many deals being announced. So is it because there's still a fairly wide data spread?

David H. Ownby

I think it's less that at this point, Bo. I think people just forget that these deals don't happen overnight, that people need time to vet out what they think the right value is. And like we said before, we do continue to see deals in the marketplace. And here are other deals that are coming to the marketplace. But just to your point, no transactions have actually happened yet, but that doesn't mean that there's no activity in that marketplace.

Bo Tang - Barclays Capital, Research Division

Okay, great. And then also could you talk about some of the drivers behind your box office per screen in the quarter versus the industry?

David H. Ownby

Sure. When we look at the different sources out there for the industry, if I remember these correctly, Box Office Mojo, I think, show's down 2.7% for our period. Rentrak for the U.S.A., only not for North America, shows much closer, right at 3% down. And it also reflects there's been a little bit of screen growth in the industry. So when you do an apples-to-apples comparison, what we get is that the industry is -- in the U.S., it was down about 3.2%, 3.3% per screen, and we were down 3.4% per screen. So in our -- from our perspective, we were basically right in line with the industry. We always encourage people to take a broader view of that and not necessarily look at it on a quarter-to-quarter basis but think about a 12-month period or a year-to-date period. And for both the trailing 12-month period and for the year-to-date period, I think we're, again, right in line with what the industry is reporting for box office.

Operator

Our next question comes from the line of Barton Crockett with Lazard Capital Markets.

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

Since acquisitions are kind of top of mind right now, I was wondering if you could remind us on what your criteria is for acquisitions in terms of you look for something to be accretive within a certain period of time or what type of multiple are you going to contemplate relative to your trading multiple. And then also talk about kind of the window for this. I mean, how long before you kind of fish or cut pace in terms of acquisitions versus dividend. Cinemark and others have kind of spoken there may be a couple of here kind of window around the digital transition, you'll know whether it's there or not. So a little bit of color around that would be great.

Amy E. Miles

I mean, I guess, as far as with respect to what we look for, we're always looking for high-quality assets. We like to see a high percentage of stadium seating and our assets there are going to be beneficial to our long-term free cash flow strategy. So again, that's -- when we think about it, it's not geography or other basis. Focus is more of an asset-based focus. Historically, we have paid anywhere from 5x to 7x for acquisitions. And the accretion for us is pretty immediate. So from that perspective, you did not have a lot of synergy risk in our business. And from that perspective, we've been able to, on the majority of our acquisitions, take that multiple and generate either a turn to 1.5 turns of synergies. So you can see on these levels today that would still be very accretive for our business. So you can think about the universe of opportunities out there and that's how we'll evaluate those. I don't think today that we have a specific time frame with respect to when you'd make one decision or the other. But what I can say is that where I believe we have been very successful over time is we have been able to have a very different disciplined capital structure. We've returned over $22 to shareholders over time. We've increased dividends during that time period, and we've also executed a lot of tuck-in acquisitions. And those happened not in lieu of each other but in conjunction with each other, those strategies. So that is how I would think about that window from our perspective.

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

Okay. And then I wanted to ask a question about the film margin which was better than I was anticipating. You said it was kind of above past average even though the concentration at the top would have suggested maybe below, kind of average, film margin. How does this play out? Was it really driven by studio mix or is there some type of sustainable margin lift that you're getting on that line?

David H. Ownby

Barton, quarter-to-quarter, there's always a little bit of studio mix there depending on exactly which studios have the top films that can move the number a little bit. I think if you look at our 5-year average for the second quarter, prior to this second quarter, it was 53.9%. That included some quarters that had very high concentration at the box office, even higher than this one did. For example, I believe 2007 even had a higher concentration at the top than this quarter did. But when you put that all together, I didn't view this quarter as really anything out of the ordinary from a film cost perspective. I think our highest for any second quarter in the last 5 years was 55%. The lowest was 52.6%, last year. And this number was right in between there, again, with a concentration that was in between those 2 as well.

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

Okay. And then the concession per cap acceleration in the second versus the first quarter, was that really just film mix or was there something else happening there?

David H. Ownby

Barton, a little bit of it was film mix. We did have -- last year, if you look in the second quarter, The Hangover 2 was the biggest picture of the quarter and that, obviously, that's a film that typically we would sell less concessions at. So the mix of films help us a little bit. But when I really look at the data of what drove that increase was just a volume increase in both beverage and popcorn. We measure the volume by how many units of those products that we sell per thousand customers. Our beverage volume was up over 4% and our popcorn volume was up over 6.5%.

Operator

Our next question comes from the line of Townsend Buckles with JPMorgan Chase & Co.

Townsend Buckles - JP Morgan Chase & Co, Research Division

One on 3D. The shares seem to be slipping again this summer, similar to what we've seen in the past this time of the year. Do you feel this is a seasonal issue around factors like capacity constraints? Or are there other trends you're seeing?

David H. Ownby

Townsend, very rarely do we really look at it on a film-by-film basis because, obviously, we're going to play all the films. We care about the portfolio. And if you look this quarter, it tells you something the opposite of what you actually see on a film-by-film basis, which is 3D continues to be very stable. And in this particular quarter, even a growing part of our business, we -- I think we've talked about it in the prepared remarks that our box office in the second quarter last year was about 17%. Premium ticket sales from this year, that number is up significantly to over 23%. So while there may be films that -- some films that perform at a high ratio and some films that perform at a lower ratio, we care much more about the overall box office. And from our perspective, that was a positive trend this quarter.

Townsend Buckles - JP Morgan Chase & Co, Research Division

Okay. So you're not seeing anything in particular as far as being a seasonal factor there?

David H. Ownby

No. Again, it's -- over time, it fluctuated film to film and then we have seen some of that. And then to your point, I think last summer, there was a little bit -- at this point in the year, there was a little bit of that but there's nothing that we see there that we can point to that's the cause of that.

Townsend Buckles - JP Morgan Chase & Co, Research Division

Okay. And David, can you give us an early sense of your CapEx and screen outlook for next year in terms of new builds and closures?

David H. Ownby

Sure. I think we're finally now starting to kind of get back to normal after a few years of slower new builds and slower growth. So I think next year will look much more like a normal year for us, which a normal year, I would say, is somewhere between $115 million and $125 million of CapEx. We would likely get for that 8 to 10 new theaters with 125 to 150 screens. And we probably would offset that with closures of somewhere between 75 and 100 screens. So we're probably talking about net screen growth of about 50 screens.

Operator

Our next question comes from the line of James Marsh with Piper Jaffray.

James M. Marsh - Piper Jaffray Companies, Research Division

Just 2 quick ones here. One, there's been some reports that MGM might be thinking about going public again. Obviously, they haven't been doing a lot of feature film releases since the financial meltdown. But do you think that would be helpful to driving more traffic in your theaters by increasing the total number of films? And then secondly, on Open Road, you mentioned, I think, 4 different releases coming up. Is there a range that you could give us for what that average P&A spend would be for those films?

David H. Ownby

I'll take the second question first, James. We don't really like to get in the habit of talking about the individual deals that Open Road makes. I will tell you that 3 of those 4 films are ones where Open Road does have some P&A commitment. The fourth film in November release is actually just a service deal. But in terms of the individual deals, each one is different, and each one out, we try to make the deal that we felt like made the most sense for us in light of how we felt about the film.

Amy E. Miles

And back to your question, James, with respect to MGM. I think any time that you see incremental funds flowing into the business from a film production perspective, it's only going to be beneficial on our end. I think it's hard to quantify what that benefit might be today, but I do think it's a positive for our side of the business.

Operator

Our next question comes from the line of Tuna Amobi with S&P Capital IQ.

Tuna N. Amobi - S&P Equity Research

So I've got a few as well. First, Amy, I was wondering if you can provide us an update on your mobile initiative. And then with regard to potential conversion away from the 35 millimeter, I think you've made the point a few times now. I was wondering if what you're hearing from the studios, maybe any color on a potential time frame for that full migration. Is this maybe speculative at this point? Or are you actively having those discussions just to kind of help to put a time on it? And lastly, for David, I suppose, online ticket, it is my understanding that you guys are somewhere between maybe 5% to 6% overall sales from sites like Fandango. So in order to help me understand a little bit more about the economics of that and how you guys are pushing that, can you maybe provide some color if you're actively looking to increase your sales through online ticketing? Any color on seasonality of that channel, perhaps the kinds of tickets that people are buying there and also the qualitative or nonmonetary benefits that you may be getting online that may incentivize you to continue to increase those percentages over time?

Amy E. Miles

Okay. Tuna, I'll start with respect to the first part of your question, which was mobile initiative. If you remember the first announcement we made with respect to mobile was we were one of the first to launch mobile ticketing on a wide basis. So we are continuing to increase the number of screens that we have today that feature mobile ticketing. So that's been a customer amenity that we think has been very promising. I think it's early today to forecast any numbers, but it will probably go to some of that question that David can answer as the last part of your question regarding how many more tickets we can sell online, because we think that mobile is going to increase while not online, the access and availability to our ticket inventory and that's going to be a positive. The second piece of our mobile activity was we did release a mobile app for Regal Entertainment Group. Again, all these ways from a mobile perspective are just different tactical ways that we can, from a strategic perspective, provide greater access to our ticket inventory, so that's primarily our focus with mobile. And from a research perspective, we're going to spend more time on how we can better communicate with our customers, what can we do from a concession offering, what can we do from a ticket offering and how can we use mobile to facilitate on a lot of those different ideas that we have around customer interface. So that's where you'll see us moving towards a mobile goal. And then -- and I'm sorry, what was the second?

Tuna N. Amobi - S&P Equity Research

The 35-millimeter migration.

Amy E. Miles

Yes. I mean, we talked about -- at the end of this fiscal year, we expect that the industry will be over 75% digital, and you're seeing an accelerated conversion internationally also. So from that perspective, we would think it's hard to put a date for that but you're probably getting, as we look out, say, past 2013, you're getting close to the end of that time period for -- I mean, I'm sorry, for 35 millimeter.

David H. Ownby

And Tuna, as for the online ticketing, you asked about some of the particulars and some of the -- what types of movies people buy online tickets for. And really, I would classify largely the online ticketing market today as 2 groups: one, it's geography-based in a lot of our theaters in big urban markets where the seats are at a premium. Oftentimes, those markets have a very high ratio of online ticket sales because if you don't buy your ticket online, and you try to show up at the theater to buy a ticket, oftentimes you're out of luck. And the other group is what I would call the event picture films this year like The Hunger Games or The Avengers or The Dark Knight Rises where people really want to be -- see that movie on the first night and so they buy their ticket ahead of time online. And today -- up until today, that's really been the 2 primary areas where people buy -- use online ticketing. Now to Amy's point earlier with our mobile strategy, we are -- one of our efforts there is to make it easier and easier for a customer to buy a ticket to a Regal Entertainment Group theater, and one of the ways they can do that is through our app. And as you all know, Fandango has their own app as well that people can use to buy tickets at our theaters. So going forward, I think our strategy there, again, is just to make sure that we make it as easy as possible for customers to find us and to buy a ticket and communicating with them through our web app is a very easy way to do that.

Tuna N. Amobi - S&P Equity Research

That's very helpful. And just a quick follow-up on that, David. Do you have an economic incentive from -- purely from an economic perspective to continue to kind of increase that percentage? I know it's not entirely up to you, but I'm not sure what kind of arrangements that you have with the online partners.

David H. Ownby

Yes, we do have an agreement with Fandango. They are our exclusive provider of online ticket sales, and we do share in the service fee that Fandango charges to buy those tickets.

Operator

Our next question comes from Bishop Cheen of Wells Fargo.

Bishop Cheen - Wells Fargo Securities, LLC, Research Division

You've answered most of the questions. Let me ask you an M&A follow-up. For 2 decades, I have heard about the idea of rationalizing the zones and swapping theaters. Seeing a lot of -- heard a lot of chatter, haven't seen much of it. Is that idea dead? Does that have merit?

Amy E. Miles

Bishop, really, I guess we don't focus many of our efforts on ways that you can swap theaters. Most of our strategy with respect to M&A is how do we buy and acquire theaters that we make -- that we think makes sense for the circuit. So from an overall M&A strategy, that's where we focus our time and our efforts.

David H. Ownby

Just to add to that, very few of our theaters are in zones where we compete for films significantly. So I'm not sure there's a lot of benefit to that strategy as well.

Bishop Cheen - Wells Fargo Securities, LLC, Research Division

Fair enough. All right. And then second with housekeeping. The Q, when will that be filed?

David H. Ownby

We -- I think the day is August 6 -- August 6 or August 7 is the due date, Bishop.

Bishop Cheen - Wells Fargo Securities, LLC, Research Division

Okay, so that's off, far enough off. If I want to get some granularity on your balance sheet, is that something just do offline calling you? Or do you want to run through that test gate now?

David H. Ownby

I can actually -- Bishop, I think we prefer you just wait for the filing of the 10-Q.

Operator

Our next question comes from the line of David Miller with Caris & Company.

David W. Miller - Caris & Company, Inc., Research Division

David, if I could just drill down on the other operating expense line. You guys just block and tackle on this one beautifully. It came in roughly $6.5 million below our model, so that got you an extra $0.04. I know you house a lot of stuff in there. There's utilities expense, there's insurance, stuff like that. Is it just so much lower because you have so many less theaters now versus 12 months ago? Or are these theaters just operating more efficiently? Anything you're willing to flush out on that would be great.

David H. Ownby

David, we went through a period there for about a year where we did take some real dollars out of the cost structure. And I think I've said for a couple quarters now that, that low-hanging fruit was basically behind us. So we've gone through a new baseline maybe. But what you really saw this quarter was we have a lower attendance. Our attendance was down 7% or 8%. And as a result, we were able to incur lower payroll costs at the theaters. That's actually the #1 factor. To a lesser extent, we did -- our screen count did go down, so there's a few of those non-rent occupancy costs that go with those screens. And then, again, offsetting that was the fact that we had higher premium ticket sales, and we had to pay IMAX and RealD a little bit more.

Operator

Our next question comes from the line of Robert Fishman with Nomura.

Robert Fishman - Nomura Securities Co. Ltd., Research Division

Amy, one for you. Is there anything you can share with us on potential plans to join the ultraviolet consortium? And maybe what benefits you could foresee if Regal was part of that?

Amy E. Miles

I think it's pretty mature to the say whether or not we join the consortium. I would tell you today that we are looking to see how we can participate and -- in various downstream marketing -- or I'm sorry, downstream, our ancillary opportunities. We have a lot of customers that come through our doors. We have a lot of information on these customers due to the benefit of our loyalty program. So we are looking to see if there are opportunities for the company today in the aftermarket for that. I think right now, it'll just be a little premature to speculate on what those may be, but it is something that we're looking at.

Robert Fishman - Nomura Securities Co. Ltd., Research Division

Okay, great. And David, if I can just follow up on the other operating expenses. Can you talk about how you foresee these cost savings kind of translating through the rest of the year? And are there any cost efficiencies that you're getting from the digital screen upgrades that you can help us quantify?

David H. Ownby

Yes. I'll take that second part first. I do think part of the payroll savings that you've seen over the last several quarters, some of that is just the result of the continued rollout of digital. It's hard to quantify exactly which -- what piece of that is. I would say, overall, it's a relatively minor piece of the reduction. But certainly, there is some benefit there. And again, as we move through the rest of the year, I think we've gone to a point where we've kind of take down the onetime reductions we were able to generate over the last 12 or 18 months. At this point, we're back to a situation where other OpEx will, generally speaking, will kind of move with attendance and with the amount of premium business that we do.

Operator

Our next question comes from the line of Benjamin Swinburne with Morgan Stanley Smith Barney.

Benjamin Swinburne - Morgan Stanley, Research Division

It's Ben Swinburne. We had one of the biggest deals in the industry in a long time over the last couple of months. I wanted to get your thoughts on the AMC transaction and what you think it means for the industry and for Regal in particular and just any comments on it in general.

Amy E. Miles

Yes, I think what we said before is that with respect to the AMC and Wanda deal, we think it's really a positive for the industry. And if you think about it, they were able to attract an outside investor who came into the industry in a big way. So I think whenever you have that happen that creates awareness about our industry from a more global perspective, which I think benefits us. And any time you can attract a new investor at an accretive multiple, I think that also helps from an industry perspective. So we're great partners with AMC in a lot of our ventures, and we would expect that to continue post this transaction.

Benjamin Swinburne - Morgan Stanley, Research Division

Did you guys think they'll behave any differently or invest differently or spoke of a different product as a result of new ownership?

Amy E. Miles

Yes, I think that's more of a question that they're going to have to answer instead of Regal answering. But I can say throughout the various things where we work with AMC, we do have a great partnership.

Benjamin Swinburne - Morgan Stanley, Research Division

Great. And just on the concession growth. I think, David, you had said that you are up and running at 40 locations with the extended menu. I don't know if that's something that's a big deal in terms of driving growth. You had a couple of years now of pretty solid concession per cap growth. I'm sure it's not all mix shift within the films. Can you just give us a sense for the order of magnitude how important that piece of it is, and if that's something you guys can expand further into next year? And do you think that makes sense for your business?

David H. Ownby

Yes. Given that it is only at 40 locations right now, it obviously doesn't have a significant impact on the overall company per cap. It is having an impact at those 40 theaters, and we're just trying to -- we've moved -- we rolled out 30 or so theaters. We stopped to look at how those were doing and refined the program a little bit. We've gone back out to a few more theaters and I think you'll see us continue to do that for the remainder of this year and continue to watch what kind of benefit we get from that in those incremental theaters.

Benjamin Swinburne - Morgan Stanley, Research Division

Got it. And then my last question, just on the third quarter. You mentioned quarter-to-date box office. I don't know if you guys are willing to talk about the full quarter and what your expectations are. If not for box, just how the Olympics might impact attendance? And also, how do you think the film mix might impact rental or concession growth? Anything we should be keeping in mind on those fronts?

David H. Ownby

Yes, I mean, we try not to get in the business of giving box office guidance, Ben. I mean, we do like the film slate for the remainder of the quarter. We think there's good titles out there, a good mix of titles out there. As for the Olympics, it can be a little bit hit and miss. I mean, oftentimes when the Olympics is in a different time zone that doesn't directly coincide with the evening moviegoing hours, it seems like it doesn't have quite as much of an impact as maybe when the Olympics are in the U.S. time zones. So I guess it remains to be seen exactly how that will play out. But I think when we look at -- obviously, we're comping against a record summer last year. And I think we've been saying for a while that as long as the box office could kind of hold its own versus that record summer last year, we felt like that was a good day for the industry and then we can get to Q4 where we have a much easier comp.

Operator

Our next question comes from the line of Matthew Harrigan with Wunderlich Securities.

Matthew J. Harrigan - Wunderlich Securities Inc., Research Division

Also on the Wanda front. I mean, they've gone out and indicated they have some pretty ambitious play-outs in some other overseas markets. Everyone always thought of Regal as a domestic-only player for a lot of reasons, but the AMC itself splintered itself very badly in some of those overseas markets. They're nonetheless with some of speculation they might do some things were you thought you can get some critical mass. Is that something you look at strategically now? And then lastly, on The Hobbit out of cinema com where you'll be showing it at a 48-frame per second rate and I know that your digital equipment is flexible for that, but can you talk a little bit sort of technically about the feel of that, the benefits for 3D and I know there's not a lot of products that's eminent in that forecast -- format. It's just -- not really format but at that frame rate, how that's evolved over the course of years.

Amy E. Miles

I guess with respect to our M&A focus today, we have historically and concurrently believe that there is still a lot of domestic opportunities for us. So again, as we think about where we have achieved success historically in an acquisition and an M&A front, that's all been domestically. And we still believe that there's opportunity there. Now that being said, if something came our way internationally and it was accretive or could we consider it, we would always evaluate the opportunity. But I do believe that those are going to be a little fewer and harder to find over the next couple of years, and I don't feel the same way about the domestic opportunities. I just believe we're going to have more of those as we look out over the next, let's call it, 2 to 3 years. All right, with respect to the 48 frames per second, it is a technology that will be new. It's going to be introduced with The Hobbit. And from Regal's perspective, what we're planning to do is dedicate or have about, let's say, 2,500 or so of our 3D screens capable of showing the 48 frames per second. So it's Peter Jackson, it's a new technology, so we're excited about being able to bring that technology to our customers. So we're committed. We're working with Sony to make sure that we're going to be ready to go by the time The Hobbit is released.

Operator

Our last question comes from the line of Jim Goss with Barrington Research.

James C. Goss - Barrington Research Associates, Inc., Research Division

I have a couple of things. First, when you have a quarter like the one we're moving into with Spider-man and The Dark Knight being fairly dominant franchises, aside from the impact to sort of squeeze your film rental margins, are there any specific things you've noticed over time when it's lesser of a situation vis-à-vis, maybe a lot of maybe decent but smaller films?

David H. Ownby

Jim, nothing that's particularly impactful necessarily. I mean, anytime we have the big event films like you're talking about, like Spiderman or like The Dark Knight, those are times we're going to step up for the big openings that those films command. And currently, that has some impact on our payroll costs for the quarter. But typically, in a given quarter, whether it's a quarter like this second quarter, which was highly concentrated in a few films or like the first quarter of this year, which had a lot of breadth to it, we've been able -- we found away over time to manage our payroll costs in each situation. As far as other costs go in those situations, really not a lot, not a lot of changes based on the attendance pattern in the theater. Really, payroll is the #1 thing that is affected by that.

James C. Goss - Barrington Research Associates, Inc., Research Division

Does is affect the concessions at all in terms of more or less depending on the types of films?

David H. Ownby

That seems to travel more with the genre of the film as opposed to how popular the film is. That is obviously assumes that we've staffed the concession stand accordingly, which we think our guys in field have done a great job doing this year, and I think that shows through in our concession per caps. But if in terms of whether a big blockbuster movie or a smaller movie maybe later in the quarter generates different concession per caps, it really has more to do with the genre of the film than it does the overall popularity of it.

James C. Goss - Barrington Research Associates, Inc., Research Division

Okay. And the last thing, in terms of the acquisition front. Are you pretty set and concentrating on the larger markets, as you have traditionally? Or do you think you would stray beyond into other sizes of markets? Or do you think they have different operating styles that might make it more of an element of risk to what you do that isn't necessary to pursue?

David H. Ownby

Jim, over time, if you look, we bought theaters in a lot of different markets and a lot of different-sized markets. And to Amy's point earlier, what we really look to there is the quality of the asset as opposed to where it is on the map. And so as we evaluate acquisitions, we're going to look for those that we believe have good, modern assets and that can contribute to our strategy of generating free cash flow over a long period of time.

Operator

There are no further questions at this time. I'd like to hand the floor back over to Ms. Amy Miles for closing comments.

Amy E. Miles

Thank you for joining in today. Enjoy the rest of the summer, and we look forward to speaking again in October. Thank you.

Operator

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

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