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Carmike Cinemas, Inc. (NASDAQ:CKEC)

Q1 2008 Earnings Call

May 12, 2008 5:00 pm ET

Executives

Kate Messmer – ICR Inc.

Michael W. Patrick – Chairman and Chief Executive Officer

Fred W. Van Noy – Chief Operating Officer

Richard B. Hare – Chief Financial Officer

Analysts

David Miller – SMH Capital

Operator

Welcome to the Carmike Cinemas, Inc. first quarter 2008 earnings conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host Kate Messmer of ICR.

Kate Messmer

Before we begin let me remind you that in accordance with the Safe Harbor Provisions 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 risk, uncertainties, and other factors that may cause the actual of performance of Carmike to be materially difference than 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 to Michael Patrick, Carmike Cinemas’ Chairman, CEO, and President.

Michael W. Patrick

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 first quarter earning conference call. On today’s call we would like to address the first quarter box office performance, the benefits about digital 3D platforms specifically Hannah Montana and U2, the pricing policy which we implemented in our box office and concession stands during the fourth quarter of 2007 and the second quarter of 2008, as well as additional measures to reduce operating cost.

The first quarter got off to a great start with a strong carryover films from the fourth quarter such as National Treasure which contributed significant amount of its $290 million growth during the first quarter 2008. Other fourth quarter films such as Alvin and the Chipmunks, I Am Legend, The Bucket List, and Juno helped to generate positive momentum going into the first quarter.

Our first quarter was helped by strong performance of Dr. Seuss’ Horton Hears a Who, 10000 BC, Cloverfield, Jumper, and 21. Additionally, through our digital 3D cinema platform we were able to play Hannah Montana in 190 theaters during the first two weeks of February. We’re extremely pleased with the results as we posted a 14% market share with this 3D concert event. Hannah Montana was followed by the U2 3D concert which generated additional alternative content revenue during which is typically an extremely slow box office period for commercial films. These movies and Hannah Montana concert gave us an increase in our average attendance per screen of 1% in this year’s quarter that underperformed as an investor.

With the success of this February’s 3D release behind us we are extremely excited with the 3D release schedule in the pipeline. Beginning this July with the Journey to the Center of the Earth 3D followed by Fly Me to the Moon 3D in August, and the reissue of Nightmare Before Christmas 3D in October 2008 looks to be a great year for 3D. We see this 3D technology as a key component in supporting our box office performance against last year’s difficult comps in the same manner Hannah Montana picked up our first quarter this year. Scheduled for release in 2009 is Monsters Vs Aliens 3D in March, Ice Age 3D in July, Toy Story 3D in October, and [inaudible] 3D in December. Currently there are 29 3D releases scheduled in the next several years. Although we have completed our initial plans for 3D installations, we will likely exercise our current agreement with Real D to an additional 100 3D screens prior to the end of 2008.

The admission and concession price increases on November 16, 2007, allowed us to enjoy an average ticket increase of 12 % over the same quarter of last year and an average concession another per cap increase of 6%. We implemented an additional 2% box office admission increase on April 25 of this year and implemented an additional concession price increase on April 28 which should continue to increase our average per cap ratio through this year. With minimum wage and energy costs increasing, we implemented this pricing just prior to the opening of our summer season which begins on May 2 with a strong box office performance of Iron Man opening to a $101-million weekend.

This summer’s lineup is really beginning to shape up. With the current success of Iron Man we are anticipating good results with the remainder of the second quarter films as Disney’s Chronicles of Narnia II, the much anticipated Indiana Jones and the Kingdom of the Crystal Skull, Sex in the City, Kung Fu Panda, You Don’t Mess With the Zohan, The Incredible Hulk, The Happening, Get Smart, Wanted, and finishing our second quarter with Disney-Pixar Wall-E opening on June 27. Compared to what we experienced in 2007, we believe that the release pattern seems to be spread out more evenly throughout this summer rather than last summer where we experienced a more frontloaded lineup during May.

I would like now to turn over the call to Fred Van Noy, our Chief Operating Officer.

Fred W. Van Noy

I would like to begin by reiterating what Mike touched on regarding our revenue performance for the quarter. Our circuit-wide price increases established in November along with the impressive box office carryover from the fourth quarter into the first quarter on movies like Alvin and the Chipmunks, National Treasure II, The Bucket List, and I Am Legend continued the holiday season attendance momentum to the New Year. First quarter film openings such as Cloverfield, Fools Gold, 10,000 BC, Horton Hears A Who, 27 Dresses, Juno, and the Hannah Montana 3D concert were instrumental in sustaining this attendance momentum resulting in a 7.8% increase in total revenue for the first quarter.

If you look at these mentioned films and analyze the target audience they attracted, we were able to provide all segments of our customer base well made entertaining movies that attracted families, teenagers, pre-teens, senior citizens, couples, women, and men, a point that we have in the past said was missing for outstanding box office results. Our pricing initiatives along with a great mix of movies allowed us to once again improve our average ticket price from $5.76 in last year’s first quarter to $6.45 in the same period this year, a 12% increase quarter over quarter.

Of course, the major contributor to this increase came from Hannah Montana 3D concert and our ability to implement a one-price advance admission ticket of $15 in an $18 ticket price for the day of the sale. Our concession pricing policy also improved our average per caps from $3 per person in first quarter of ’07 to $3.18 in this quarter, a 6% increase quarter over quarter. We have continued to evaluate pricing opportunities as we moved forward and we carefully analyzed the impact of these increases with the trends that guide in our decisions. We’ve implemented pricing adjustments in April to more than cover the operating expense increase we are experiencing in minimum wage hikes, utility rate hikes, fuel surcharges, and other increase incurred by the company.

With regards to the operating expenses, we are addressing our increased cost in the quarter, which will primarily contribute to additional staffing on films such as Hannah Montana, Horton Hears A Who, and 10,000 BC, and the continued increase in credit card fees due to higher use of credit card transactions. We’ve put in place additional monitoring control that not only tracks payroll percentage costs, but also compare the number of employee hours incurred each day against the same day prior week, prior month, prior year, and year to date.

These additional controls have allowed our operations team to target specific allocated payroll hours in each location by day based on last year’s usage in order to assure us of proper controls going forward. These results from these new controls have been positive. Our real estate department continues to optimize our theater portfolio by focusing on the 25 % owned properties in the group. We sold two properties that were classified as surplus properties in the first quarter and anticipated closing on two additional locations in the second quarter.

We also have a number of locations that are classified as better-used properties that are in our early stages of contract negotiations that may provide us up to $4 million in sales in the near future. In addition to these sites we have been able to negotiate early lease terminations on two underperforming locations, both scheduled to close in the second quarter and we have closed two additional underperforming theaters through natural lease expirations in the first quarter.

The summer season is off to a good start with Iron Man, and we are looking forward to the opening of Prince Caspian, Indians Jones and the Kingdom of the Crystal Skull, Sex in the City, Kung Fu Panda, Incredible Hulk, Disney’s Wall-E, Will Smith and Hancock, The Dark Knight, and Journey to the Center of the Earth 3D. We do have a great selection of entertaining films scheduled throughout the summer that should be appealing to our customers, and we feel the current gasoline issues will keep people closer to home to enjoy these films. I would like to now turn the call over to Richard.

Richard B. Hare

On today’s call I will provide highlights for the first quarter and discuss our current debt structure. Our top-line revenue increased 7.8% or $117.8 million in the first quarter from $109.3 million in the prior year period. Breaking down our total revenue, admission revenue increased 9.6% or $78.9 million versus $72 million in the prior period and concessions and other revenue increased 4.2% to $38.9 million compared to $37.4 million in the prior year. As of March 31, 2008, Carmike had 262 theaters and 2339 screens.

During the quarter we closed two theatres with 10 screens which increased our average screens per theater to 8.9 from 8.5 in the first quarter of 2007. Our attendance on a per screen basis increased 1% during the quarter which exceeds the industry according to recent results from other motion picture exhibitors. Carmike box office revenue per screen was up an impressive 14 % during the quarter. We’ve realized a 12% improvement in our average ticket price and a 6% improvement in concession and other per person.

As previously mentioned we implemented a company wide box office concession price increase in November. In addition, the premium pricing for the Hannah Montana 3D event in February contributed to the improvement in our average ticket per person. Our average ticket price increased 12% to $6.45 and our average concession and other per person increased 6% to $3.18 in Q1 of 2008 compared to the previous year period. Film exhibition costs increased slightly by 3/10 of a percent to 53.5% of admissions revenue, our concession cost with 10.5% of concession and other revenue which were in line with our expectations and relatively consistent with the average level we reported in the first and second quarter of 2007.

Theater operating cost increased $4 million to $50.3 million in the first quarter 2008 from the prior year period due to several factors including higher salary expense, repair and maintenance costs, and increased credit card processing fees. As we previously discussed, the company has initiatives in place this year which will bring our costs more in line. In addition as previously mentioned, the company has initiated an additional ticket and concession price increase in Q2 of this year which will more than offset any additional minimum wage increases.

Theater level cash flow remained flat at $21.2 million in the current year period. 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 administrative expenses decreased over 6% or $400,000 during the quarter to $5.6 million, primarily the result of reduced professional fees which were partially offset by higher non-cash deferred compensation. Excluding non-cash deferred compensation the general and administration expenses totalled $4.9 million during the quarter, a 10% reduction over last year’s period.

Our operating income for the quarter increased 7.3% to $6.3 million compared to $5.8 million in the prior year. Net interest expense was down $660,000 or 5.6% to $11.1 million from the prior year period due to lower interest rates on our outstanding debts and a reduction in principal. We have shown the results of our discontinued operations separately on our income statements for Q1 of 2008 and 2007.

The company closed one and six theaters in these years respectively and has reported the results of their operations including gain and losses on disposal and discontinued operations in our consolidated statements in operations for each period presented. Our real estate group continues to work on finding the best use of our portfolio of theaters. As a part of this analysis during the quarter the company sold $1.1 million of surplus property. Excess property is the result of having additional property adjacent to an existing theater or it can be the result of closing a location.

Capital expenditure for the quarter was $2.7 million. Our cash needs on a going forward basis remain modest due to our previous modernization program and our attractive digital conversion costs. We anticipate our CapEx levels to be approximately about $18 million for the year which is well below our 2007 expenditure as we completed our digital rollout last year.

As of March 31, 2008, Carmike’s cash and cash equivalent balance was $18.1 million and the company had total debt outstanding which includes long-term debts and capital lease and long-term financing obligations of $421 million. The company’s current debt structure excluding capital leases and financing obligations consists primarily of our borrowings under our existing credit agreements as amended. As of the end of March 2008, we had $162.5 million of borrowings under our term loan and $138.3 million of borrowings under the delayed draw facility, and at March 31, 2008, we had no borrowings under our $50 million revolving credit facility.

At the end of the quarter the borrowing rate was 6.6% on the term loan and 6.5% on the delayed draw loan. Both of these loans were based on 3-month LIBOR borrowings, and they will renew on May 27 and June 10. As mentioned on our previous call last quarter, the current interest rate environment has generated a 2% reduction in our borrowing rates over the prior levels. This should result in a $6 million reduction in annual interest costs on our $300 million of bank debts. We remain in compliance with provisions of our banks debts.

Our leverage ratio with consolidated debt to adjusted EBITDA is approximately 4.2 times which is below the required ratio of 4.75 times. As a reminder, the terms of our credit agreement, the consolidated debt excludes long-term financing obligations of approximate $85 million. Our adjusted EBITDA 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 goodwill and asset impairment among other items in the previous 12 months.

In closing, Carmike has seen a promising start of 2008. We are seeing the results of our leading position in digital technology with the success of the 3D Hannah Montana concert event during the quarter. We will remain focused on our cost controls, flexibility in pricing, and leveraging our leading position in 3D to generate additional cash flow for our company and enhance shareholder value. Thank you for listening to our call today. Operator, we would like to open our call up for questions at this time.

Question-And-Answer Session

Operator

(Operator instructions) Your first question comes from David Miller - SMH Capital.

David Miller – SMH Capital

Richard, can you just talk about what raw attendance was. I think you mentioned a percentage, but I am trying to reconfigure the modality over here – if you could just mention a raw attendance figure that would be great. And then also, what is your NOL balance at this time, and then I have a couple of followups.

Richard B. Hare

Sure. The raw attendance balance for the first quarter of 2008 was $12,242,000. In ’07 it was $12,629,000. That’s in the MDNA section of the 10-Q. And then our NOL balance – we got $114.5 million of NOLs available – those are subject to a limit of approximately $3.4 million a year and those expire through the year 2020.

David Miller – SMH Capital

Okay. And then, just as a followup, I just want to make sure I understand why there wasn’t any margin expansion in the quarter or at least very little on the operating income line – I mean, you guys obviously clocked it in with the Hannah Montana show and the top-line looks wonderful, but I am just wondering why there wasn’t any margin follow-through – was it the salary expenses that you mentioned or was there some other reason?

Richard B. Hare

It was primarily the salary expenses. We also incurred some additional repair expenses – we were trying to get our theaters prepared for the summer business. And we’ve had some impact on our credit card fees – our credit card usage has just skyrocketed as a comparison to the previous years.

David Miller – SMH Capital

Okay. And then finally – if I may – what are the latest developments on Screenvision. My understanding is that it’s not going very well there for you and is there any chance you see yourself switching over to National CineMedia in the near future. Thanks.

Michael W. Patrick

Screenvision is doing exceptionally well for us. I don’t understand that comment at all.

David Miller – SMH Capital

Okay. My understanding was that on a throughput basis and in terms of a CPM basis – if you will – that that was commanding an inferior CPM to the same statistics yielded from National CineMedia.

Richard B. Hare

No. David, this is Richard. We are very satisfied with our relationship with Screenvision and the economics that it affords us. We’ve got a great working relationship with Screenvision and at this point in time we don’t see anything changing that at all or that we’ve heard anything about.

David Miller – SMH Capital

Okay. Thank you.

Richard B. Hare

Sure.

Operator

It appears that’s all the time we have for questions today. Mr. Hare, I’ll turn the conference back to you.

Richard B. Hare

Thank you for listening to our call today. We look forward to speaking to you next quarter.

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