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
David Miller - Caris & Company
Carmike Cinemas, Inc. (CKEC) Q2 2008 Earnings Call August 11, 2008 5:00 PM ET
Operator
Good day and welcome to the Carmike Cinemas Incorporated second quarter 2008 earnings 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 of ICR. Please go ahead.
Nicki Sacks
Thank you. Good afternoon. This is Nicki Sacks with ICR. Before we begin, let me remind you in accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, the company notes 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. I’m Michael 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 second quarter earnings conference call.
On today’s call, we would like to address the second quarter box office performance, the expense initiatives that were implemented to reduce operational costs, and the benefits of our digital 3D platform.
Our second quarter box office lineup was driven primarily by this summer’s blockbuster release of Iron Man, Kung Fu Panda, WALL•E, and the highly anticipated Indiana Jones and The Kingdom of the Crystal Skull. Although these films generated good box office performance, overall second quarter box office declined in part due to the different year-over-year comparisons with last May’s release of Pirates of the Caribbean 3, Shrek 3, and Spider-man 3, each of which generated over $300 million in domestic box office.
As mentioned on our previous call, during our second quarter we implemented a strategic admission and concession price increase on April the 25th, which provided us with an average ticket increase of 5.5% over the same quarter last year and an average concession per cap increase of 4.8% over the same quarter last year. Average ticket increased by $0.32 from $5.84 to $6.16 and our concession per cap increased by $0.15 from $3.14 to $3.29.
We have finally broke the $9 per patron barrier on small-town America by recording a $9.45 per patron for the quarter. We implemented our revised pricing just prior to the opening of our summer season, which began on May 2nd with a strong box office performance of Iron Man opening to a $101 million weekend.
I am pleased to report that by closely monitoring our expense controls, we were able to show significant reduction in our operational costs, specifically salaries, concession costs, and general theater expenses. We realized a 24% reduction in our hourly payroll quarter over quarter compared to 2007. This was accomplished through implementation of controls designed to analyze and compare on a day-by-day basis the actual hours used during a specific period. The precise hourly allowance are sent through our operational department to each individual theater, dictating the allocation of hours to be used based on the anticipated business demand. Richard and Fred will speak to these initiatives in more detail later in our call.
Through our cost reduction and sale of excess property, we have been able to focus on reducing our debt. During the second quarter of this year, we made a $5 million principal pre-payment of debt and at the end of last year, we made a $15 million prepayment of debt. In total, we have reduced our bank debt of $23 million over the past 12 months.
Moving briefly to our third quarter box office, through our digital 3D cinema platform, we were able to show Journey to the Center of the Earth 3D on 327 screens and generate a combined box office concession revenue of approximately $6.5 million. We are pleased with the results from this 3D presentation, which generated fives times the per screen revenue compared to our 2D average screen performance. This allowed us to enjoy nearly a 100% increase in our normal share of the industry domestic market.
Additionally, we experienced no customer push-back from our $2 3D surcharge.
With the success of Hannah Montana during our first quarter, followed by Journey to the Center of the Earth 3D, we remain optimistic regarding the upcoming 3D release of Fly Me to the Moon in August, a re-release of Nightmare Before Christmas in October, and Bolt in November. We see this 3D technology as a key component in supporting our box office performance during the upcoming years. The schedule for 3D release in 2009 is My Bloody Valentine in January, [Cora Line] and Disney’s Jonas Brothers in Concert, both in February, Monsters Versus Aliens in March, Ice Age in July, Toy Story 3D in October, A Christmas Story in November, and of course, Avatar in December.
Our third quarter shows good potential with a record box office of $158 million during the opening weekend of Dark Knight and a $27 million opening weekend for Mamma Mia, both of which opened on July the 18th. For the combined weekend, the industry registered a record-breaking box office of $260 million, crushing the previous record of $218 million by nearly 20%. We are encouraged by this industry up-swing in business as it truly indicates that even during an ongoing economic downturn our nation is experiencing that if Hollywood provides us with what the public wants to see, they will come.
Digital also continues to benefit Carmike Cinemas. Through the flexibility provided by a digital platform, we were able to show Dark Knight in as many auditoriums as needed for the 12:01 special screening on opening day. This provided us with a competitive advantage as we were able to accommodate anyone who approached our box office. We had several locations that sold out all auditoriums in the complex. This was only possible through the digital technology.
We are anticipating positive box office results for the remainder of this year’s lineup. We began our third quarter slowly but experienced a good pick-up during the third week of July with Dark Knight and Mamma Mia. We are encouraged by the fourth quarter release schedule beginning in October with Disney’s High School Musical 3, Warner Brothers Body of Lies, and continuing through the holiday season with Madagascar 2 and another James Bond film, Harry Potter and the Half-Blood Prince, The Day the Earth Stood Still, and Marley and Me.
Although the overall box office was below our expectations, we are overall pleased with our cost control initiatives.
Now I would like to turn the program over to Fred.
Fred W. Van Noy
Thank you, Michael. I would like to begin by reiterating that our average ticket price for the second quarter rose by 5.5%, or $6.16 versus $5.84 against the same period last year and our average concession per caps increased 4.8%, or $3.29 versus $3.14 quarter over quarter. These gains were primarily accounted for by our circuit wide pricing policy established on April the 25th in anticipation of minimum wage increases.
Our pricing strategy continues to be monitored against other entertainment venues on a regular basis and adjustments are made as we determine our ability to implement these new levels on a market-by-market evaluation.
Our operational expenses are still the focus of our company as we reduced our other theater operating expenses for the quarter by over $2 million, and we were able to see a reduction in our concession costs against concession and other revenue for the quarter from 11.2% last year to 10.8% this year.
Most of our savings in operational expenses for the quarter came from salaries, which was an 11% decrease, supplies a 17% decrease, telecommunications a 16% savings, and employee benefits with a 15% savings. Gary Krannacker, our VP of Operations, and his team continues to explore ways to reduce major expense categories, such as our credit card utility costs as well as other general operating expenses.
The quarter got off to a weak start in April for the industry, with very little benefit from Easter, which fell in the first quarter this year. We did get a pleasant surprise from Iron Man and Indiana Jones, which performed well but compared to last year’s May against Spider-man 3, Pirates 3, and Shrek 3, each producing well over $300 million nationally, we had very difficult comparisons to overcome.
Kung Fu Panda really started some momentum for us in June, followed by WALL•E and the Hulk, but Sex and the City did not perform at the same level as the metropolitan markets did.
We feel as a comparison our attendance was impacted by not having a 3D moving in the quarter, compared to our success with Meet the Robinsons in last year’s second quarter, which generated 453,000 customers for us. As we have been saying in the past, 3D has been and will continue to be a major influence on our attendance levels.
We plan to have two theaters open in the fourth quarter of this year and expect to have six theater open in 2009. Our new builds are build-to-suit projects requiring very little CapEx spending from the company. We have reduced our 2008 CapEx spending from $18 million down to approximately $13 million, as we reset our expectations through the remaining year. It is also our plan to close nine additional theaters with a total of 40 screens by the end of the year. Four of these nine are discount theater operations and the remaining five our lease expirations that are weak performing locations.
Looking forward, we are currently evaluating our option to install our final 100 3D units. The current units have the newest technology, allowing us to offer the 3D experience in our largest auditoriums an ability we could not offer at the time we rolled out our 3D program in the last two years.
This new installation will completely cover our entire circuit’s need and allow us to meet any attendance demands for future 3D tent-pole pictures such as Monster Versus Aliens and Avatar.
You have obviously heard of the major success of Dark Knight and its passing the $400 million mark recently. We have shared in this success as well as the 3D movie, Journey to the Center of the Earth, where we increased our national circuit market share by almost 100%. We also experienced a five-to-one ratio box office sales at our 3D locations compared to our 2D locations. I think it is interesting to point out that we played Journey 3D in 187 locations and only had 12 locations playing the movie in 2D, a clear indication of how saturated we have the 3D system throughout our circuit.
As of August the 15th, there are 23 3D films on the schedule through 2010, representing nine different national film distributors which clearly demonstrates this industry’s commitment for 3D.
The fourth quarter is anticipated to have a wide variety of good movies to offer the consumers; movies such as Saw V for Halloween, Madagascar 2, and the James Bond movie, Quantum of Solace, starting out November, following into Nicole Kidman and Hugh Jackman in Australia, and then Harry Potter and the Half Blood Prince, and Disney’s 3D Thanksgiving picture, Bolt, along with Four Christmases and The Curious Case of Benji with Brad Pitt. Then December opens up with The Day the Earth Stood Still and Will Smith’s Seven Pounds, to be followed by Jennifer Anniston’s Marley and Me, Revolutionary Road with Leonardo DiCaprio, and Bedtime Stories, starring Adam Sandler, all opening Christmas Day.
The general consensus in the industry is that the fourth quarter appears to compare more favorably against last year’s results.
I would now like to 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 second quarter and discuss our current capital structure. Our top line revenue decreased 7.7% to $118.2 million in the second quarter from $128.1 million in last year’s second quarter. Breaking down our total revenue, admissions revenue decreased 7.6% to $77.1 million versus $83.4 million in the prior year period, and concession and other revenue decreased 8% to $41.2 million compared to $44.8 million.
At the end of the quarter, Carmike had 257 theaters and 2,308 screens. During the quarter, we closed five theaters with 31 screens, which increased our average screens per theater to nine from 8.9 in the first quarter of this year.
Carmike’s box office revenue per average screen was down 3.8% during the quarter. Our average ticket price increased 5.5% to $6.16 and our average concession and other per person increased 4.8% to $3.29 in the second quarter of 2008 compared to the previous year period. Both of these were primarily driven by our previously announced price increases we initiated in the second quarter of this year and the fourth quarter of last year.
Our attendance on a per screen basis decreased 10% during the quarter. This reduction is due in part to film mix, particularly in the month of April, difficult comparisons in May of last year, and there were no 3D movies in this year’s second quarter. In the prior year period, Meet the Robinsons played in 3D on 191 of the company’s screens, which impacts this metric.
Film exhibition costs increased slightly by four-tenths of a percent of 57.1% of admissions revenues. Our concession costs were 10.8% of concession and other revenue, down from 11.2% in the prior year period, which were in line with our expectations and consistent with the average level from the previous quarter.
Theater costs decreased $2.2 million to $47.3 million in the second quarter of 2008 from the prior year period due to lower personnel costs and occupancy costs. We were pleased to see progress on our cost savings initiatives, particularly in the face of rising energy and food costs.
As previously discussed, we expect our second quarter ticket and concession price increases to more than offset the minimum wage increase for this year. However, we continually review all of our markets for additional pricing opportunities throughout the year.
Theater level cash flow decreased $3.8 million to $22.5 million in the second quarter of 2008 from $26.3 million in the same period in 2007. Theater level cash flow is defined as operating income before general and administrative expenses, depreciation and amortization expenses, gain or loss on sale of property and equipment, as well as non-cash charges.
We are not just focusing on reducing our theater cost. General and administrative expenses decreased 13.6% during the second quarter to $4.6 million, primarily the result of reductions in our salary and wage expense, incentive compensation, and legal and professional fees.
Excluding non-cash deferred comp, the general administrative expenses totaled $4 million during the quarter, an 11.8% reduction over last year’s period. We were very pleased with our continued progress in improving our efficiency and lowering these costs.
Our operating income for the second quarter decreased to $8.1 million compared to 11.6 in the period last year.
Net interest expense was down $1.8 million to $10.1 million from the prior year period due to lower interest rates on our outstanding debt and a $23 million reduction in principal over the past 12 months on our senior bank debt.
We have shown the results of our discontinued operations separately on our income statements for the six months ended June 30, 2008, and the six months ended June 30, 2007. The company closed five and three theater 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.
Our real estate group continues to work on finding the best use of our portfolio theaters and 35-millimeter projectors. As a part of this analysis, during the quarter the company sold $1.6 million of property and 35-millimeter projectors. Year-to-date, we’ve generated $2.8 million of proceeds on the sale of assets and we expect to generate $8 million to $10 million for the year in total.
Capital expenditures for the six months ended June 30 2008 were $4.5 million. Our cash needs on a going forward basis remain modest due to our previous monetization program and our attractive digital conversion costs. We are revising our projected CapEx to be approximately $13 million for 2008, which is below our previous estimate for the year and well below our 2000 CapEx level of $22.7 million.
In the prior year, we incurred additional costs associated with our digital conversion. In the current year, we have shifted our expansion strategy to include only build-to-suit projects that require very little capital spending by Carmike.
This strategy enables the company to expand our footprint with minimal capital requirements. We can use the excess cash to further pay down debt. We anticipate opening two theaters during 2008 and closing an additional nine theaters by the end of the year.
At the end of the quarter, Carmike’s cash and cash equivalent balance was $15.3 million and the company had total debt outstanding, which includes long-term debt and capital lease of long-term financing obligations of $415.1 million. The company prepaid an additional $5 million of term debt during the quarter, which brought our bank debt balance down to $295 million.
The company’s current debt structure excluding capital lease and financing obligations consists primarily of our borrowings under our existing credit agreement. As of the end of June 2008, we had $162 million under our term loan and $133 million outstanding under our delayed draw facility. Our $50 million revolving credit facility was untapped at the end of the quarter.
At the end of the second quarter, the borrowing rate was 6.31% on the term loan and 6.47% on the delayed draw loan. Both of these loans are based on six-month LIBOR and they are scheduled to renew on November 28th and December the 10th.
As mentioned on our previous calls, the current interest rate environment has generated a 2% reduction in our borrowing rate over the prior year levels. We remain in compliance with the provisions of our bank debt. Our leverage ratio of consolidated debt to adjusted EBITDA is approximately 4.27 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 1.91 times, which is above the required 1.65 times. Our EBITDA is adjusted upward for non-cash compensation expense, as well as any other non-cash charges.
In closing, we are focused on driving further improvements in our results through maintaining our focus on cost controls at the theater and corporate levels, optimizing our real estate portfolio, 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. 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 David Miller, Caris & Company.
David Miller - Caris & Company
Good afternoon. Just a couple of housekeeping items; Richard, I still have your NOL balance as being $114.5 million. Is that correct? Was there any change in the quarter? It doesn’t look like there was. And I just have a follow-up. Thanks.
Richard B. Hare
Sure. We are right at $116.7 million of federal and state operating loss carry-forwards as of the end of June.
David Miller - Caris & Company
Okay, wonderful. And then the $2 up-charge for Journey to the Center of the Earth, can you guys just give me your overall sort of 100,000 foot view as to what kind of elasticity in pricing that might carry going forward? I mean, Jeff Katzenberg, we cover DreamWorks Animation, you know, he’s been talking rhetorically about a $5 up-charge for some of his films. A lot of the guys at DCIP were talking about maybe a $3 up-charge as being standard. It looks like you charged $2 for Journey. Could you just comment as to any wiggle room in the future with that up-charge? Thanks.
Fred W. Van Noy
When we played Meet the Robinsons, we had 10 locations that we pushed that $2 to $2.50, kind of just to test the waters. With Journey, we had 17% of our play dates at the $2.50 level. I think that of course we’ll continue to push this. We had absolutely no push back with the 17%. They were of course our larger markets but as we get to Bolt, I think Bolt will be the movie that we will be able to really escalate this price up a little bit higher.
And as far as a $5 threshold or a $3 threshold, we are just going to keep testing the market and see where it will take us.
David Miller - Caris & Company
Okay. Thank you.
Operator
(Operator Instructions) With no further questions in the queue, I would like to turn it back to Mr. Michael Patrick for any closing remarks.
Michael W. Patrick
Thank you for attending our call today and as always, if you have any follow-up questions, just call Richard, Fred, or myself. Thank you very much.
Operator
Ladies and gentlemen, that does conclude today’s conference. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!