Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Regal Entertainment Group (NYSE:RGC)

Q3 2012 Earnings Call

October 25, 2012 4:30 pm ET

Executives

Amy E. Miles - Chief Executive Officer and Director

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

Analysts

Bo Tang - Barclays Capital, Research Division

James M. Marsh - Piper Jaffray Companies, Research Division

Eric O. Handler - MKM Partners LLC, Research Division

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

Townsend Buckles - JP Morgan Chase & Co, Research Division

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

Martin Pyykkonen - Wedge Partners Corporation

Ryan Fiftal - Morgan Stanley, Research Division

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

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

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

Tuna N. Amobi - S&P Equity Research

Michael Hickey - National Alliance Capital Markets, Research Division

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

Operator

Good afternoon. My name is Rhea, and I will be conference facilitator today. At this time, I would like to welcome everyone to the Regal Entertainment Group Fiscal Third Quarter 2012 Earnings Release Conference Call, with our hosts Amy Miles, Chief Executive Officer of Regal Entertainment Group; and David Ownby, Chief Financial Officer, 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 fact communicated during this conference call, may constitute forward-looking statements. These forward-looking statements involve risks and uncertainties. Important factors that can cause actual results to differ materially from the company's expectations are disclosed in the Risk Factors contained in the company's annual report on Form 10-K dated February 27, 2012. All forward-looking statements are expressly qualified in their entirety by such factors.

Now I will turn the call over to Ms. Amy Miles.

Amy E. Miles

Good afternoon, and thank you for dialing into our third quarter conference call. For the next few minutes, I will provide an overview of third quarter results for both the industry and Regal, and an update on several strategic initiatives. Following my remarks, David will highlight our financial results and as always, we will conclude the call with a question-and-answer session.

First and foremost, we are extremely pleased that 2012 is shaping up as a great year at the box office. Through last weekend, year-to-date, industry box office totaled just over $8.7 billion, an increase of approximately 4.5 versus -- 4.5% versus the same period last year, and the highest total in the industry's history at this point in the year.

With many exciting titles scheduled for release in the upcoming holiday season, we are optimistic that 2012 will be among the industry's very best box office years.

When looking at the third quarter industry box office on a stand-alone basis, we noted several factors that contributed to an overall decline of approximately 5%.

The quarter got off to a tremendous start as 3 films: Ted, The Amazing Spider-Man, and The Dark Knight Rises drove a record July box office of just under $1.3 billion.

However, in the latter part of the quarter, the industry faced a very difficult comparison with a strong August and a record September in 2011, and was likely somewhat impacted in the aftermath of the Aurora tragedy and by the widely televised summer Olympic Games in late August.

Additionally, a decline in box office revenue generated by 3D films had an impact on the industry's third quarter results. While we were somewhat disappointed by the late third quarter results, we are pleased that the downturn was short lived. For the first 3.5 weeks of our fiscal fourth quarter, industry box office revenues increased by over $140 million or 28%, and completely erased the shortfall experienced in the third quarter.

From an operational standpoint, our field personnel once again demonstrated their ability to provide a great customer experience while at the same time, keeping a close watch on our variable cost.

For the third consecutive quarter, our adjusted EBITDA margin exceeded 19%, and on a year-to-date basis, our adjusted EBITDA total of just over $426 million is the highest in our history.

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

We are also pleased with the results of several ongoing strategic initiatives during the quarter. Our conversion to digital cinema is almost complete. At the end of the third quarter, over 63 of our -- 100 of our screens were equipped with digital projection systems, and over 92% of our buildings were fully digital. The financing and subsequent installation of the new projectors over the last 2.5 years was a significant undertaking for everyone involved, and we are extremely pleased with the seamless execution of the hardware conversion and the revenue opportunities that have been afforded to us in a digital opportunity, and the financial success and stability of DCIP.

We also made significant progress in our effort to offer a premium viewing experience to a larger portion of our customer base. Adding one IMAX screen and 4 RPX screens during the quarter.

We continue to see incremental revenue and returns from our premium auditoriums and as a result, we had elected to expand our relationship with IMAX to allow for 10 additional screens, bringing our full commitment to 87 screens. We expect the rollout of these new IMAX screens and our RPX-branded screens to continue into 2013 and beyond.

Our concession programs continue to be a key driver of revenue and adjusted EBITDA margin. Our expanded food menu is now available at over 50 locations, and for the fifth consecutive quarter, had a positive impact on our concessions per patron.

The success of our expanded food menu, combined with continued increases in the demand for our core concession products, helped us achieve a concession per cap increase of just over 4% during the third quarter.

And finally, it's been just over one year since our film distribution joint venture, Open Road Films, released its first film, which was late September of 2011. In the ensuing 12 months, Open Road's 6 theatrical releases had generated total box office revenue of over $155 million. We are extremely pleased with Open Road's early success and remain optimistic regarding their ability to create incremental value for our shareholders. We fully expect each of these strategic initiatives to have a positive impact on our operations and free cash flow for the remainder of 2012 and into the future.

With the fourth quarter already off to a great start and the holiday season just a couple of weeks away, we believe that several factors will ultimately drive box office results in the final months of 2012. First, while last year's holiday box office season was disappointing, it provides a relatively easy comparison period for this year's fourth quarter. Second, the film slate includes a full complement of films that will be available in a premium format: 3 IMAX films and 8 3D films. And third, the release schedule includes titles that should appeal to a variety of moviegoers. 3 key films: James Bond in Skyfall in early November; the final installment of the Twilight Saga over the Thanksgiving holiday; and part one of Peter Jackson's The Hobbit in mid-December are surrounded by films for the family, comedy and adult drama audiences. With these factors in mind, we are optimistic regarding the potential for box office success for the remainder of the year.

In summary, we are again extremely pleased with our operational execution during the first 3 quarters of the year, and the healthy year-to-date box office environment.

I'd now like to turn the presentation over to David for a discussion of our financial performance.

David H. Ownby

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

For our fiscal third quarter, we generated total revenues of $692.9 million, including $471 million of box office revenue, $187.3 million of concession sales and $34.6 million of other operating revenue.

On a per screen basis, our admissions revenue fell by approximately 7.7% as compared to the same period last year. The decline in our admissions revenue was driven entirely by decreased attendance, as our average ticket price remained relatively flat with the same period last year at $8.79.

A decline in premium ticket sales largely offset a 3.1% increase in our 2D ticket price and led to the flat ticket price during the quarter.

Premium ticket sales overall accounted for approximately 15% of our box office revenue during the quarter as compared to 23% in the same period last year.

Our concession revenue decreased by 5% in the aggregate, but grew by 4.2% on a per attendee basis. As has been the case in recent quarters, the improvement in our concession per cap was largely driven by improvements in beverage and popcorn volume, but also benefited from the expanded food menu currently available at over 50 locations.

Other operating revenues increased 9.8% as compared to the same period last year due to increases in revenues from our vendor marketing programs and from our gift card and discount ticket 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 third quarter box office environment, we were once again extremely pleased with our operational execution.

Our film and advertising expense of $247.6 million represented 52.6% of admissions revenue, a decrease of 50 basis points as compared to the same period last year. The overall decline in industry box office revenue and a film slate that lacked a significant number of high grossing films were the primary drivers of our lower film cost during the quarter. When viewed from a long-term perspective, our film and advertising cost as a percentage of admissions revenue was slightly below our historical third quarter average.

Our 86.4% concession margin remained flat with the same period last year, as minor 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 concessions.

Total rent expense of $95.9 million increased slightly due primarily to the additional rent associated with the 77 new screens we opened in the third quarter, partially offset by the rent savings related to theaters that closed during the last 12 months. On a per screen basis, our rent expense increased approximately 1% as compared to the same period last year.

And as Amy mentioned earlier, our field personnel's focus on cost control continued to have a positive impact on our operating results. Total other operating expenses of $185.2 million declined by 5.4% in the aggregate and 4.8% on a per screen basis as compared to the third quarter of last year.

Reductions in theater level payroll costs in response to lower attendance levels, reductions in non-rent occupancy costs and lower payments to RealD associated with the decline in our premium ticket sales were the primary components of the decrease.

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 third quarter.

We are extremely pleased that the increase in our concession per cap and our operational execution helped generate adjusted EBITDA and adjusted earnings per share that were ahead of or in line with consensus Wall Street estimates.

As for our asset base and our balance sheet, capital expenditures net of asset sales for the quarter totaled $27.7 million, and we continue to actively manage our asset base, opening 6 theaters with 77 screens and closing one theater with 8 screens to end the quarter with 524 theaters and 6,621 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 $85 million and $100 million. And we expect to end the year with approximately 515 theaters and 6,585 screens.

With respect to the balance sheet, we ended the quarter with just over $250 million in cash and a total debt balance of $2 billion.

The significant growth in our adjusted EBITDA in the first 3 quarters of 2012 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 3.3x, and our leverage ratio, as defined by our senior credit facility, totaled approximately 2.3x, well below the covenant limit of 4x.

In closing, we are extremely pleased with the box office environment, combined with our operational execution, resulted in record adjusted EBITDA for the first 3 quarters of 2012, and we remain optimistic regarding the potential for box office success for the remainder of the year.

Operator, that concludes our prepared remarks. You can now open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Anthony DiClemente with Barclays Capital.

Bo Tang - Barclays Capital, Research Division

This is Bo Tang in for Anthony. One for Amy and one for David. Amy, when you look back at the 4Q film slate from last year, there didn't seem to be much in terms of counterprogramming over the last few weekends of the year. So as you look through the holiday slate this year, is your sense that the studios have learned from that? And they've done a better job of spacing out the film slate?

Amy E. Miles

I think when you look at the -- we're much more excited about the film slate as we look at it with respect to scheduling for the fourth quarter of this year. I think we've mentioned that not only is there -- if you look at the films that are to be released over the next, call it, a couple of months, there's a wide variety of films that we think will touch a lot of the audience base. And we also think that there's better spacing. If you remember, we had a lot of family-themed films clustered around the Thanksgiving time period last year. And you don't see that in this year's fourth quarter. So from that perspective, not only does it look like a lot of great titles left, but I do believe the spacing or scheduling is better this fourth quarter.

Bo Tang - Barclays Capital, Research Division

Great. And David, I was curious how you guys are thinking about the dividend in the context of any changes in tax policy? And whether buying back stock, could that be an option either in the open market or from your current shareholders to the extent you want to maximize your float?

David H. Ownby

Sure, Bo. I think our approach to capital allocation really hasn't changed much over time. We try to consider what all the factors are and certainly, you mentioned tax policy and that's one factor. It's certainly not the only factor that we consider. But when we do think about capital allocation, I think we've said before, we always want to make sure we do things that create value for our shareholders. In the past for us, that's really included a two-pronged approach, we've used some of our cash to return value through -- primarily through dividends. We've also used our cash to grow our business both by buying and building theaters and by investing in things like Open Road Films, which Amy mentioned earlier. That's still our approach. We still want to go through the process to figure out what the best uses of our cash are. We've talked a lot about the M&A environment that we're in today, and that it's very robust and certainly, we're actively looking at the opportunities that are available in that market. But at the same time, if you look at our history, we've been able to do those types of transactions and still maintain a healthy dividend and continue to return value to shareholders. So in summary, our approach there just hasn't changed, Bo.

Operator

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

James M. Marsh - Piper Jaffray Companies, Research Division

Two questions. First on the soda ban in New York, I just was wondering what tactics are you using at the theater level to mitigate this? And what's your kind of longer term strategic approach to either reverse this or limit it to New York? And then the second question relates to 3D. And Dave, you typically discuss 3D as being a pretty consistent business. It's plus or minus 20% a box. Is there any change in your mind in the appetite of consumers for 3D? Or is it the slate? I mean, how do you reconcile the numbers that you saw the last quarter?

David H. Ownby

Sure, I'll take that second one first, James. We talked a lot -- you're right about the stability in the 3D business. We typically talk about that on a 12-month basis. We've said many times that the short-term nature of a quarter, the product's going to dictate to a certain extent how successful 3D is in the short term. And I think, if you just -- even if you just look back one quarter from this one, I mean, in the second quarter, I believe the premium product was about 23% of our box office, that's at the high-end of the range. Obviously, this quarter was a little bit different given that one of the top 3 films of this quarter was available in 3D, so that this quarter wound up at the low end of the range. But that certainly, that one quarter hasn't changed the way we think about the stability of 3D or of the premium products in general. We still view that as a very -- as a part of our business that has evolved into a very stable platform.

Amy E. Miles

And to follow-up with respect to your question on New York, James, we have chosen not necessarily dealing with the soda ban at the theater level at this point, but have chosen to work with -- of large members NATO on behalf of the industry. And right now, NATO with several other plaintiffs are in a legal process, first of all, I guess, to seek injunction with respect to the ban. And so, we'll have to see how that plays out over the next couple of months. But if the ban continues, and it's allowed to go on, then we'll just have to figure out what we do, I guess, from a packaging and pricing opportunity that we would have to offset any of the cash flow impacts the ban could have.

Operator

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

Eric O. Handler - MKM Partners LLC, Research Division

Two questions for you, actually. So looks like you underperformed the overall industry a bit on admissions by a couple 100 bps. It's been a while since we've seen that. Anything in particular cause of this underperformance? And then secondly, looking at your food and beverage rollout of the new concession offerings, that seems to be going very well. You're at 50 theaters now. How fast can you continue rolling this out? And to what extent -- you got a 4% increase in your per cap this past quarter, but when you look at it just on the theaters that have this new program in place, how much of an increase are you getting on a per cap basis?

David H. Ownby

Sure. Let's take that second one first, Eric, on the concession program. I think by the end of this year, we'll probably be somewhere in the 65 to 75 theater range in terms of the expanded food menu. And certainly, we're pleased with the results so far, and we continue to look at the sites where that program makes sense. It's added about $0.01 to the per cap being only in about 50 theaters. So if you kind of just do some back of the napkin math, that would tell you that it's probably give or take, a $0.10 impact at the individual theater where we have that. And that's probably in the area code anyway. As far as our performance versus the industry this quarter, I think the best way I can say it for the first part is that we were a victim of our own success last year. If you go back to the third quarter of last year, you'll see that we outperformed the industry by over 100 basis points. So we essentially created a tougher comp for ourselves this year. The only other -- that explains most of it. The only other factor I'll tell you is, we did open 77 new screens during this quarter. Most of those opened very late in this quarter, so even though they added to our screen count, they didn't add a lot to box office revenue. So we talked a lot about the fact that there will be quarters where we over and underperform, but over the long term, we'd expect to be in line with or hopefully even a little bit ahead of the market. And certainly, we're excited about the prospects of beginning to open new theaters again, which we haven't done for a couple of years.

Operator

Our next question comes from the line of Ben Mogil with Stifel, Nicolaus.

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

Curious since you've seen Wanda take over AMC, any sort of material differences in the competitive strategy you've seen from them at all?

Amy E. Miles

No, no changes here. I think we have a great partnership and relationship with AMC, and we would expect that to continue.

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

Sure. I meant more sort of in terms of anything that they're doing on the exhibition side that you see as being a little bit different that could sort of competitively change the dynamics?

Amy E. Miles

No, there's nothing that -- I mean, obviously, they'd have to answer their own question with respect to their strategy, but there's nothing that we have seen, just as another exhibitor.

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

Okay. We saw a part of Ray Bobbies [ph] being traded over this summer. When you look at that multiple that it was trading at, can you talk about that multiple vis-a-vis sort of what you're seeing in the marketplace that's for sale now? Is that sort of a reasonable multiple that people are now spending, is that high, is that low? Just curious how you take that multiple and think about what's for sale right now.

David H. Ownby

I think ultimately, Ben, we've talked a lot about what drives that multiple sometimes is the quality of the asset that you get and the markets where those assets are. And certainly for that group of theaters that you're talking about there, it seemed like that was a number that, I guess, made sense is what I'll say. To the extent, you get assets that are in great markets that are recently built. And certainly, you could see something a little higher than that. To the extent you have older assets that maybe aren't in attractive markets, you might see something even lower than that. But on the surface, that acquisition seemed to make sense from a pricing standpoint.

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

Okay. And then lastly, because I know you've given to us before, can you just give us what the 2D, 3D and IMAX ticket prices were sort of in the actual number?

David H. Ownby

Be happy to do that, Ben. Our 2D ticket price for the quarter was $8.33, our IMAX ticket price was $15.90, and our 3D ticket price was $11.91.

Operator

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

Townsend Buckles - JP Morgan Chase & Co, Research Division

David, on the cost side, as you pointed out, you continue to do a great job maximizing profitability in up and down box office quarters. It looks like you've been running at about $27,000 to $28,000 per screen over the last few quarter on OpEx. Is that a good run rate going forward? Or do you have some cost inflation that maybe kicks in over time?

David H. Ownby

Probably nothing dramatic, Townsend, just a couple of things I'll note there. As we do begin to build more screens, which we opened a few late in this quarter, there are some fixed costs, obviously, that go with those new screens that typically are a little bit higher than the average screen that we operate today. And then, absent that, the only thing I would tell you from a variable cost standpoint is our -- directionally speaking, I would always expect other OpEx to move with attendance. So to the extent attendance is up, then we should incur more payroll, and to the extent attendance is down, we should incur less. That's not necessarily a 1:1 relationship, but it's certainly directionally the right way to think about it. And then, as you saw this quarter, a certain portion of that cost line is dependent on the 3D and the IMAX and the premium product revenue that we generate each quarter. To the extent those numbers move up and down, then the variable cost associated with that revenue will move up and down as well.

Townsend Buckles - JP Morgan Chase & Co, Research Division

Okay. And then as we look at ticket pricing, so much of the quarterly changes now are about the mix of premium formats, is your sense that a fuller premium slate this quarter should drive pricing higher than your base rates? And should we think about that base rate being the 3% you saw this quarter, this past quarter?

David H. Ownby

Yes, I think we've talked a lot about the fact that we'd expect to be able to maintain over the long term, a 2% to 3% increase in our base ticket price. And then, to your point about the premium product, ultimately, it will depend on how successful each individual film is. Over the long term, we believe that the premium products have reached a fairly steady state, but that number could move up and down quarter-to-quarter.

Operator

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

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

I wanted to ask a question about the Anschutz ownership. I mean, they've announced that they are looking to sell Anschutz Entertainment Group. And I was wondering if you have any input from them about their view of their ownership of Regal. Whether their actions with Anschutz Entertainment Group suggest any broader rethink of their assets that might potentially affect their position in Regal?

Amy E. Miles

Barton, all I could say there with respect to that is, we are not included as part of the Anschutz Entertainment Group umbrella. We obviously share a common owner, but we are not included as part of the Anschutz Entertainment Group. So I couldn't really comment on sales intent on a going forward basis. I could just -- the only thing we can say is, management is obviously, we're not included as part of that transaction.

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

Okay. And then if you look at the ticket price data that you just gave, I mean, the 2D stuff was up 3% or so year-to-year, but it looks like the RealD and the IMAX stuff was flat or up 1% year-to-year, I mean, the 3D and the IMAX stuff. Is there less pricing leverage you have in the premium formats than the traditional or was that just kind of a fluky thing this quarter?

David H. Ownby

So I think what you see there, Barton, is we just haven't really made any move on the premium that we charge on top of the 2D ticket. So when you load that 3% on the base through on the entire IMAX ticket price, it represents a much smaller portion of the total. And the same to a certain extent is true for RealD. I do believe, from a 3D standpoint, for the third quarter, we -- the skew of films was a little more slanted toward kids pictures. I believe we have 2 kids pictures in the top 5, both of which were in 3D. So we probably had a few more kids tickets sold for 3D pictures as well.

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

Okay. One final question, in that $10.5 million of other net, can you give us a little bit of a breakdown of kind of what drove that?

David H. Ownby

Sure, Barton. We had a $4 million of income from DC -- from our investment in DCIP. And if you remember, Open Road had 2 films that came out, one during the third quarter and one right at the beginning of the fourth quarter. So they incurred P&A expenses for both of those films during the third quarter. And as a result, we had a $14.5 million loss on our Open Road investment.

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

Okay. Do you see the Open Road kind of swinging differently in the fourth quarter with the P&A now out of the way?

David H. Ownby

Well, as we've talked about before, that number is a little lumpy just given how they have to account for those P&A costs. So some of that will depend on exactly when they have films coming out and when they have releases scheduled. I would expect over the longer term that, that number to the extent, Open Road is successful in choosing the right films, that number should begin to smooth out some.

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

But in the fourth quarter, you've got some visibility on the release slate, does it looks like the timing's a favorable issue in the fourth quarter versus unfavorable in the third quarter?

David H. Ownby

Yes. It's a little more favorable just given that we only have one release in Q4, which is -- the film actually, comes out tomorrow, Silent Hill. And so from that perspective, it's still -- it's more favorable, I'm not sure at this point that I would say that, that turns to a positive number in Q4, I think it's going to remain -- we'll have to await and see how the remaining film opens for the quarter.

Operator

Our next question comes from the line of Martin Pyykkonen with Wedge Partners.

Martin Pyykkonen - Wedge Partners Corporation

I think I wanted to ask on the premium mix from the year-over-year, the 15% versus 23%, I know there's a few things there, but if you tried to normalize it, just the fact that Potter was out, the finale last year, it was 3D and IMAX, you had a bulk of Transformers, 3D and IMAX, versus this year, Dark Knight was obviously not 3D, but it was IMAX. If you took that 8 points of premium mix, how much do you think was just those 3 films in comparison, Transformers and Potter last year versus Dark Knight this year?

David H. Ownby

Well, that's a huge chunk of it. And if you can go one film further down the list, Martin, last year, all of the top 3 films in the quarter were presented in 3D, Harry Potter, Transformers and Captain America. This year, only one of the quarter's top 3 pictures was in 3D. That was The Amazing Spider-Man. So I think just the sheer -- the fact that those films, together have collectively accounted for about 1/3 of the box office this quarter, tells you that most of the difference is right there.

Martin Pyykkonen - Wedge Partners Corporation

Okay. On RPX, kind of going forward 2013, I don't know if you've said this already, but any plans in terms of the scope of number of RPX screens you're thinking of adding in the New Year, not so much Q4, but 2013?

David H. Ownby

Yes, I think for next year, Martin, we're looking at probably somewhere in the 20 to 25 additional RPX screens for next year, some of that will depend a little bit on some new build theaters, exactly when they get opened. But that's the right range to think about.

Martin Pyykkonen - Wedge Partners Corporation

Okay. And then just lastly, you've had this great EBITDA margin over 19%, you're almost virtually all digital at this point from a labor cost standpoint, I know you don't want to give guidance in terms of an actual EBITDA margin guidance, but any comments in terms of the leverage you'll get into next year from the fact of being all digital and every installation considerably lower labor cost?

David H. Ownby

Yes. We've been layering that in over the last couple of years, Martin. So I'm not sure you'd see a significant tick downward. But I would certainly expect us to be able to maintain the cost savings that we've generated so far.

Operator

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

Ryan Fiftal - Morgan Stanley, Research Division

It's Ryan Fiftal in for Ben. So just a question on your CapEx outlook. I believe you lowered your guidance range by $10 million. I'm guessing some of that is timing related since you took down the expectation for year end screens just a bit. So I'm wondering if that is the case? And also, just give your thoughts on your CapEx and screen expansion outlook for the next couple of years?

David H. Ownby

Sure, Ryan. Basically, it's all timing related, there's no -- we don't really -- those are just projects that as we get here toward the end of the year, we have better clarity on exactly when projects might get completed and when our dollars will go out the door. So nothing unusual going on there. When we look ahead to next year, maybe even the next couple of years, we still think we'll get back to our kind of run rate CapEx of something between $110 million to $125 million a year. And as far as -- in terms of net screen growth, I think, we're looking at somewhere around 50 to 75 screens net for 2013 and 2014.

Ryan Fiftal - Morgan Stanley, Research Division

Okay, great. And the planned IMAX expansion, how should we think about that in terms of impact to CapEx?

David H. Ownby

That CapEx is included in that number I gave you. So that's an all-in CapEx number, which includes new theaters. It includes IMAX and RPX conversions, and it includes our normal maintenance CapEx.

Operator

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

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

I got one for Amy and one for David. Amy, just as a follow-up to the 3D. I'm wondering if you can help us with the upcoming 48 frames per second release of The Hobbit, do you think that can change consumers' viewing experience and how they view the appetite to paying the 3D premium? And then maybe just any early thoughts on the upcoming 3D release slate for 2013?

Amy E. Miles

Yes. I mean, we're excited about The Hobbit in a 48 frames per second. And obviously, we're doing everything that we can to make sure that we provide that experience for as many of our customers as we can. And any time you have investment in technology in our industry, particularly by someone like Peter Jackson, we think that's good for the industry. So I think it's going to be a great test for how this will impact 3D in the future.

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

Okay. And just for David, I was thinking about fourth quarter's film and advertising expense relative to that historical fourth quarter average. Basically, do films like Hobbit, James Bond and the last Twilight boost that cost versus the average? Or should we think about basically how October's strong performance from their releases, does that -- is that the offset to that?

David H. Ownby

Yes. I would always tell you to look at the historical average for Q4 as a good starting point. And then, just from that point, kind of look at how the film slate plays out over the next couple of months. And to the extent there's a lot of concentration at the top, in maybe those top 2 or 3 films that Amy mentioned earlier in the call, then certainly, that's going to lead sometimes to a higher film cost. To the extent the box office is more broad-based and comes from a lot of different sources, then generally, that's helpful to our film cost. But again, it's hard to give that type of guidance today, simply because you don't know how the film slate's going to play out.

Operator

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

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

You're probably again, one David and one Amy. When you look at the delta working capital, it looks like it's about $50 million unfavorable relative to last year. I'm sure some of that is a function of the slow sales in Q3. Are you out to recapture that in Q4? I mean, that's where the free cash flow bonanza always is. And is that just going to reverse even more strongly than usual? And I guess secondly, for Amy, on 3D, I mean, obviously, you're not going to get over-the-top positive on it as Ang Lee or Baz Luhrmann in terms of everything being on 3D. The Life of Pi, I mean, FOX is really starting to market that as being your step function improvement akin to Avatar, if you will. Can you talk about what's different in that movie that has got some people so excited on the critical side?

David H. Ownby

Sure, Matt. On the working capital, you are correct in that typically Q3 is a drain of working capital for us. Actually, last year, if you're comparing year-over-year, last year is the outlier because last year, we had a strong September box office, so we didn't have quite as much working capital swing in Q3 of last year. I think if you look back at 5 of the last 7 third quarters, we have that negative working capital hit for the third quarter, just like we do this time. And from a timing perspective, you are correct that, that certainly should reverse -- a lot of that should reverse itself in Q4. The one thing that I'll tell you is a little bit different this year versus last year is -- and it's different every year, quite frankly. The timing of our federal tax payments was a little earlier in the year this year. So that's one reason you see that year-over-year difference. And again, some of that will take care of itself in Q4.

Amy E. Miles

And I guess with respect to your specific question on 3D, and I guess, you asked it specifically for Life of Pi. We've always felt like over time as talented filmmakers had more experience with the 3D tools, that the 3D experience would improve. And I think just one of the things that -- and we experienced at CinemaCon and I think it's just what you're seeing on the reports for Life of Pi is when -- I think, we all had the benefit of Ang Lee's introduction and getting to see what was a great visual presentation. And so I'm not trying to forecast any kind of box office here, but it was very similar to the Avatar conversation where you talk about how visually great something looks on the screen. But I think that's driving a lot of the excitement as the early footage that has been shown from a consumer perspective, it's just been a high response. But again, I think it's what we've expected to happen, that is, as individuals have more experience with the tools for filmmaking as it relates to 3D, that experience would improve.

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

Which is one element of the technology that it's kind of integrated thing, people are getting just more fast out along on the production side it sounds like?

Amy E. Miles

Yes. I think just -- again, the time and experience is beneficial for improvement of 3D.

Operator

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

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

A few questions. One of the knocks against you guys sort of operationally and from a price point perspective is that, a lot of folks think, both on the Street and I guess sort of on Main Street as well, is that your 3D price point is too high in certain areas. Could that be the reason, David or Amy, why 3D ticket sales were somewhat of a disappointment? Because I for one was actually somewhat surprised that you guys under-indexed in the quarter relative to the overall box office. And then I just have a couple of follow-ups.

David H. Ownby

I think the #1 reason, David, for the lower 3D revenue this quarter is, like I think we said earlier on Martin's question was, last year, the top 3 films of the quarter were all presented in 3D. This year, only one of the top 3 films was presented in 3D. I don't think that dynamic is any different for any other exhibitor. They put the same films we did. Again, when we look at our performance versus the industry, we answered that before as simply being a victim of our own success, given that we outperformed by over 100 basis points in the third quarter of last year.

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

Okay. Fair enough. And then just a couple of operational questions. Are you guys going to do any sort of marathon-type showings for like the first 4 Twilights or maybe the first few Bonds? I don't know how you'd have a Bond marathon, it's too many movies. But maybe the first 3 Lord of the Rings, leading up to those respective tent poles? And then also, are you guys going to be providing any extra security at the theater level for the Kathryn Bigelow film, just given the nature of the content?

David H. Ownby

On the marathons for Twilight, yes, David, we are doing those and typically do those with the series of films like that. To your point, it's a little tougher given that I think this is the 23rd or 24th James Bond movie, that's a long marathon. And we're a little far out from The Hobbit. Those types of films are the type of films we'd do those marathons in advance for. And then, I think Amy's going to take your other question.

Amy E. Miles

Yes, Will, but we're not going to comment with respect to any of our security plans for a specific film, but we always do. Any type of film that comes out. We do try to do an evaluation of the content and the risk associated with the content, and we make operational adjustments accordingly. But we wouldn't comment with respect to our plans with -- as it relates to any specific film.

Operator

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

Tuna N. Amobi - S&P Equity Research

Amy, I think you called out the Olympics and the incident in Colorado as potential factors in Q3. So I wanted to get a sense if you can help us to maybe quantify that, any lessons you learned from the Olympics, specifically? And is it fair to assume that the Aurora incident is now in the past? And there's no more carryover impact on that?

David H. Ownby

Tuna, if you don't mind, I'll take that. I think the #1 factor when you look at the box office decline in the back half of the third quarter really was the very difficult comp that we had with last year. September's box office was a record last year by a large margin. And if I'm not mistaken August, the August box office last year was the second highest box office on record. So we're certainly not surprised given that comp that the box office was down a little bit. It's much more difficult to quantify the impact of the other items you mentioned there. If any at all, certainly, just anecdotally looking and maybe instinctively looking, you would say there was some impact. But it's very difficult to measure that amount. And again, I think from our perspective, the #1 driver is far and away the difficult comp that we have with last year.

Tuna N. Amobi - S&P Equity Research

Okay, that's helpful. So David, I had a question as well on the other operating revenue line, which seems like there was some disconnect to the attendance more than I would have thought. I know you cited some positives on the vendor marketing, gift cards, et cetera. So when I think about Q4 being up strongly, trending up as Amy alluded to, and is there any reason why that line item should not sustain even stronger Q4 growth that you saw in Q3? And perhaps it can maybe help to explain that disconnect I mentioned as well?

David H. Ownby

Sure. We have had a couple of new vendor marketing partners later in -- over this year really. If you look at that number year-to-date, it's actually up about $10 million year-to-date. And certainly, that benefit will continue until we start to lap it in 2013. You are right in that there is a portion, a somewhat significant portion of that line item that is attendance-driven. But as we've layered in some of these new vendor marketing programs, some of those items are less attendance-driven and more just stable revenue source I guess. That's really the growth that you see there. The other impact there is revenue from our gift card and discount ticket program. Those programs continue to perform very well. And those are somewhat less tied to attendance than the traditional items that are included in that line item.

Tuna N. Amobi - S&P Equity Research

Okay, just for a quick clarification. When does the newly layered items you just referenced, when do they start to lap?

David H. Ownby

We'll start to lap that in the first quarter of next year.

Tuna N. Amobi - S&P Equity Research

Okay, very good. And lastly, for Amy. On the Open Road venture, I know you've got now one year under your belt. And clearly, it seems to me, correct me if I'm wrong, that you're kind of ahead of where you would have hoped to be a year ago. So I guess the question is, how has your strategy there kind of evolved in terms of the lessons you might have learned? And how this could, in fact, impact any potential tweaks in your strategy? Whether that's to do with the number of releases or the budgets, et cetera? So if you can share with us any kind of thinking on that regard?

Amy E. Miles

Yes, I think you really highlighted the points on Open Road. I mean, at this point in time, I think we mentioned earlier in our comments that the 6 theatrical releases since Open Road's inception have generated over $155 million of box office. So obviously, very pleased with the box office results. And we're also pleased with the ramp up speed. So the time that it took Open Road to get to that 6 films was probably a little bit ahead of our plan. I've said before or as we were announcing Open Road, when they were fully ramped, we thought we would do 8 to 10 films a year, but getting to 6 over that time period was ahead of plan. I think it's premature for us to tweak any kind of strategic goals for Open Road at this point, since we're just one year post-inception. But I would say that year-to-date, we have been very pleased with the results of Open Road and do continue to believe that we're going to have incremental shareholder value opportunities as it relates to that investment.

Operator

Our next question comes from the line of Mike Hickey with National Alliance Securities.

Michael Hickey - National Alliance Capital Markets, Research Division

Most of the questions have been asked. But just curious, as you look, obviously, '12 has been a phenomenal year for the box office. Moving into '13, just walk us through how you're thinking about the pipeline. And I guess, that's it.

David H. Ownby

Mike, we don't really spend too much time giving box office guidance. Particularly given the large amount of publicly available information that's out there. At this point, what we know about the film slate at least for the full year 2013 is, we know a lot of the headline titles, and we know some of the franchise titles are there. And certainly from that perspective, things look to be shaping up nicely. A lot of times, as we get closer to the individual quarter, we have a much better view or a much better outlook of how those quarters might perform. But as it sits today, I don't think we have any reason to think that the box office won't continue to be very stable as it has for the last several years.

Operator

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

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

When you look at IMAX versus RPX, you've been a strong partner to IMAX for all of the various reasons of branding, and all of the things it offers. With RPX, the distinction seemed to be the flexibility you might have and the availability of being in a market where you don't own that IMAX film. But as you go forward on this, are the operating strategies continuing to be different? Or do you think they're starting to converge a little bit? I'm just wondering how you're planning on approaching these over time? And you might bring in the Dolby Atmos opportunity to the extent that, that might be something that might distinguish RPX?

David H. Ownby

Yes, Jim, just at a high level, the way we think about IMAX and RPX is, I guess, the best news is, that we have plenty of theaters that we can incorporate IMAXs in some, and RPXs in others. And then occasionally, we have both in a few theaters. And we view the 2 strategies as very complementary to each other. To your point, to the extent that we can get an IMAX in a market of a size that makes sense for an IMAX screen, certainly, that's been our preference over time. To the extent that we have not been able to gain access to an IMAX because someone else has that right, or maybe in a market that is significantly smaller than one that might support an IMAX, then RPX has been a great alternative. And as we continue to move forward, I think you'll see our strategy continue that way, and that we'll continue to use both where they make sense.

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

In the cases where you have both in the same theater, what has been your experience?

David H. Ownby

In a very few -- to be fair, instances where we do have both, typically when we're showing the same film, the IMAX will sell out first, the RPX hopefully, shortly behind -- shortly after the IMAX sells out, the RPX will sell out too. That means it'll be a good night at that theater. But certainly, the brand recognition that the a customer has for the IMAX brand in that situation is very powerful. They've been building that brand value for a long time. We've been building the RPX brand for about 18 months. So that's not a surprise that customers choose IMAX first.

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

All right. And then one other question, regarding alternative content. Does it remain too much of a fringe issue? Or are you trying to develop any momentum to utilize your seating capacity during the week and perhaps take advantage of some things that might bring in customers when they wouldn't be there otherwise?

David H. Ownby

Well, at this point, it's certainly a very small part of our business, Jim. It's something that we continue to research and continue to -- for lack of a better term, see what -- throw at the wall and see what sticks. To this point, the things that have really worked from an alternative content standpoint are those events that seem to have kind of a built-in audience that's easy to reach. The opera is the best example. A lot of people around the country follow the opera whether it was on the radio or wherever. And when it became available at a theater, it was very easy to market directly to those people. Finding those things that work and hopefully over the long term educating our customers that they can come to the theater for something other than a movie is a process that probably is just going to take some time.

Operator

There are no further questions at this time. I would like to turn the floor back over to Ms. Miles for closing comments.

Amy E. Miles

Thank you, and we look forward to a great holiday season and speaking to you guys shortly thereafter. Thanks.

Operator

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

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!

Source: Regal Entertainment Group Management Discusses Q3 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts