Regal Entertainment Group (RGC)

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Regal Entertainment Group (RGC)

Q2 2011 Earnings Call

July 28, 2011 4:30 pm ET

Executives

Amy Miles - Chief Executive Officer and Director

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

Analysts

Anthony Wible - Janney Montgomery Scott LLC

Eric Handler - MKM Partners LLC

Joseph Hovorka - Raymond James & Associates, Inc.

Martin Pyykkonen - Hoefer & Arnett

Bo Tang - Barclays Capital

Barton Crockett - Lazard Capital Markets LLC

Alexia Quadrani - JP Morgan Chase & Co

Matthew Harrigan - Wunderlich Securities Inc.

Presentation

Operator

Good afternoon. My name is Alexis, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regal Entertainment Group Second Quarter 2011 Earnings Release Conference Call with our hosts Amy Miles, Chief Executive Officer of Regal Entertainment Group; and David Ownby, Chief Financial Officer of Regal Entertainment Group. [Operator Instructions]

I would like to remind our listeners that this conference call contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. All statements, other than statements of historical facts communicated during this conference call, may constitute forward-looking statements. These forward-looking statements involve risks and uncertainties. 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 28, 2011. All forward-looking statements are expressly qualified in their entirety by such factors.

Now I will turn the call over to Amy Miles.

Amy Miles

Good afternoon, and thank you for dialing in to our second quarter conference call. For the next few minutes, I will provide an overview of industry box office for the second quarter and update on operational results and strategic initiatives and a brief review of industry box expectations for the remainder of the fiscal year. Following my remarks, Dave Ownby will highlight our financial results. And as always, we will conclude the call with a question-and-answer session.

After emerging from a difficult winter box office period, we are extremely pleased to report that the combination of a healthy second quarter box office, the continued success of premium format films and focus on managing the variable portion of our cost structure enabled us to generate over $130 million of free cash flow during the quarter. This is our second highest quarterly total in the last 4 years.

Industry box office receipts for our fiscal second quarter increased approximately 3% versus the same fiscal period last year. In addition to the contribution from key Tim Paul films, the overall number of successful films released during the quarter helped push the box office over the $2.8 billion mark, a new record for the second quarter. In total, 13 films released during the second quarter went on to gross over $100 million versus only 8 films in the same period last year.

Premium format films released during the quarter followed a similar 3, although 3D and IMAX box office penetration rate for some individual films released during the quarter were at or below the historical range and increase in the number of films released in a premium format and the number of screens deployed industry-wide continue to have a positive impact on box office results.

Based on our review of industry sources, we estimate that the percentage of the overall industry box office generated through premium ticket sales during the quarter was approximately 15% to 17% and was in line with, or slightly ahead of, the second quarter of last year.

From our perspective, a key take away from the second quarter box office performance is the underlying increase in industry attendance. We estimate that practically all of the second quarter industry box increase was driven by attendance gains as opposed to pricing increases.

Increased attendance clearly enables us to further leverage the portion of our cost structure that is fixed and has a positive impact on our adjusted EBITDA, margins and free cash flow, and we are particularly pleased with the industry attendance growth during the quarter.

Equally as important to us as a healthy box office environment is our ability to take advantage of increased attendance to leverage our cost structure and maximize free cash flow.

As has been the case for the last several quarters, we continued our focus on cost control regardless of the box office environment. Improvements in our film and concession margins and our ability to control the variable portion of our cost structure were key components of our adjusted EBITDA and free cash flow growth during the quarter.

We are also pleased with the progress on several ongoing strategic initiatives during the quarter. In mid-June, we completed the 3D portion of our digital rollout and now have a total of 2,773 screens equipped with RealD technology. We also added one additional IMAX screen and 3 RPX screens during the quarter, bringing our total to 57 and 14, respectively.

We continue to believe our strategy of offering films to our customers in a variety of formats is the best way to maximize box office revenue and screen utilization.

With our 3D rollout complete, our technology focus will now shift to outfitting the remainder of our circuit with digital projection equipment as of the end of the quarter just under 53% of our auditorium GUI digital projectors, and we continue to install approximately 200,000 -- and I'm sorry, 200 projectors per month until the rollout is complete in late 2012 or early 2013.

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