AMC 電影院 (AMC) 2015 Q3 法說會逐字稿

Greetings and welcome to the AMC Entertainment third quarter 2015 conference call.

(Operator Instructions)

I would now like to turn the conference over to your host, John Merriwether, Vice President of Investor Relations. Thank you. You may now begin.

Thank you. Good afternoon, everyone. I'm John Merriwether, Vice President, Investor Relations and I'd like to welcome you to AMC's third quarter 2015 earnings conference call.

Before we get started with our prepared remarks, I'd like to remind everyone that as referenced in our press release issued earlier today we have posted a CFO commentary on the Investor Relations page of our website at AMCTheaters.com.

We routinely post information that may be important to investors in the Investor Relations section of our website. We use this website as a means of disclosing material, non-public information, and for complying with our disclosure obligations under regulation FD. And we encourage investors to consult that section of our website regularly for important information about AMC. Investors interested in automatically receiving news and information when posted to our website can also visit the Investor Relations area of our website to sign up for email alerts.

I would also like to remind you that some of the comments made by Management during this conference call may contain forward-looking statements within the meaning of section 27A of the Securities Act of 1933 as amended and section 21E of the Security Exchange Act of 1934 as amended. Forward-looking statements are subject to risks, uncertainties and assumptions and are discussed in our public filings including our most recent 10-K.

Statements made throughout this presentation are based on current estimates of future events and the Company has no obligation to update or correct these estimates. Listeners are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainty and that actual results may differ materially as a result of these various factors. We caution you not to put undue reliance on forward-looking statements in the forward-looking statements made during this call speak only as of the date of this call.

In addition, comments made on this call may refer to certain measures such as EBITDA, adjusted EBITDA and adjusted EBITDA margin which are not in accordance with GAAP. However, Management believes these results more clearly reflect operating performance. For a full reconciliation of EBITDA and adjusted EBITDA to GAAP results in accordance with Regulation G, please see our press release issued earlier today and furnished as an exhibit to our form 8-K, dated November 2, 2015 which is located in the Investor Relations area of our website.

After our prepared remarks there will be a brief question-and-answer session. Joining me on the call today are Craig Ramsey, Interim Chief Executive Officer and Chief Financial Officer and Mike Zwonitzer, Senior Vice President, Finance. I'll now turn the call over to Craig.

Thanks, John, and thank you, everyone for joining us this afternoon. We delivered another strong quarter in Q3 as both revenues and adjusted EBITDA grew significantly compared to last year with total revenues increasing 8.7% to $688.8 million and adjusted EBITDA growing 21% to $109 million. That is the kind of revenue to adjusted EBITDA conversion that we like to see.

We believe our third quarter results demonstrate that our continued focus on being the guest experience leader is resonating with guests. We are cultivating a culture of innovation, enhancing the AMC brand and deploying strategic initiatives that are creating value for our guests and stakeholders and actively positioning AMC for future growth and profitability.

Taking a closer look at the nearly 9% total revenue increase to prior year, we see that third quarter admissions revenues grew 5.7% to $441.3 million in line with the industry. This growth is comprised of a 7.4% increase in attendance and a 1.6% decline in average ticket price. On a per screen basis compared to the third quarter last year, attendance increased 6.7% and admissions revenue grew 4.9% compared to approximately 3.4% and 5.7% respectively, for the industry.

Admissions revenue growth relative to the industry was impacted by the strong comps we enjoyed last year on our IMAX screens. As a reminder, AMC is the largest IMAX exhibitor in North America with 150 screens and a 45% market share. IMAX performance does disproportionately impact us compared to the broader market. As an example of those comps, last year's third quarter IMAX offering, Guardians of the Galaxy, outgrossed Mission Impossible 5, the top IMAX movie this quarter by about 62%.

Looking ahead to the fourth quarter, we expect IMAX and the premium format's to be a significant contributor given the action-packed IMAX slate which includes the James Bond movie, Spectre, the final chapter of Hunger Games: Mockingjay Part 2 and the highly anticipated Star Wars: The Force Awakens. The recently announced IMAX partnership with 20th Century Fox should also increase the number and breadth of tentpole films available in IMAX going forward. We're excited about the prospects for the fourth quarter and beyond.

Adding to that excitement is the continued guest response to our comfort and convenience initiative. Our recliner reseats continue to attract moviegoers and improve the productivity of our theaters with 861 screens across 73 theaters in operation as of September 30. And, the industry outperformance continues as attendance per screen and admissions revenue per screen for the recliner theaters grew 12.6% and 13.2% respectively, outperforming the industry by approximately 920 and 750 basis points respectively. We are proud of that performance.

Importantly, we had approximately 300 screens under construction at some point in the third quarter, one of the busiest construction quarters we have had and still produced these outstanding results. With returns continuing to exceed our 25% hurdle rates, we will continue to invest in our existing theaters in the fourth quarter and beyond with the expectation to have nearly 250 additional screens online with recliners before the holiday moviegoing season begins. We continue to see competition and we continue to believe that comprehensive deployment of all five of our strategic initiatives is the difference between just a new seat in the market and an AMC amazing experience and the results speak for themselves.

That AMC amazing experience often begins with buying a ticket and we believe that process should be as easy as possible. Online ticketing has evolved into one of the easiest pathways to a ticket and the growth has been exciting to watch. Our third quarter Internet ticketing volume totaled approximately nine million tickets purchased online. That is a 64% increase over the third quarter of 2014 representing almost 20% of our total tickets sold.

Last year, online tickets accounted for about 12% of our total tickets sold. And importantly, our proprietary ticketing engine at AMCTheaters.com continues to attract guests. AMC online sold 81% more online tickets this quarter compared to last year. By making the online ticketing process as easy as possible, we're not only building connections with our guests, we're also building loyalty.

Those connections extend to our food and beverage offerings as we once again set a quarterly record with third quarter food and beverage revenues growing approximately 14.7% to a third quarter record $216.8 million. Further evidence that our comprehensive approach of improving the entire guest experience at an AMC theater creates more value than just focusing on the recliner.

I would like to take a quick step back here and revisit our 7.4% attendance increase in the quarter. Despite difficult IMAX comps from last year, our 330 basis point industry outperformance on attendance per screen, allowed us an opportunity to showcase our enhanced food and beverage options to monetize more guest visits at a very attractive gross profit margin. We believe our enhanced food and beverage programs are responsible for the 360 basis point improvement in the conversion rate we have experienced over the last four years.

That 360 basis points may not sound like much, but it equates to about 6.7 million more people purchasing popcorn and a Coke and so much more. That is about $31 million more food and beverage revenue at our $4.58 concession per patron. Food and beverage per patron grew 6.8% to a third quarter record $4.58, and we maintained our throughput as food and beverage gross profit per patron also grew 7.1% to $3.93.

We believe there is still plenty of opportunity to leverage food and beverage and apply technology to make the experience easier, more convenient and ultimately, more enjoyable for our guests. All designed to build connections and maintain relevance with our guests so AMC is top of mind when considering how of home entertainment options.

One of the best out of home entertainment options I can think of is to enjoy your favorite movie in the immersive, big site, big sound experience that is Dolby Cinema at AMC Prime. Our new auditoriums combine Dolby's vivid laser and moving audio sound technologies with AMC's cutting edge, reserved recliners. So as you sit back in the comfort of our spacious and dynamic power recliners, you will actually feel the screen action coming alive. It's truly an exceptional movie-going experience.

But don't just take my word for it. Our guest have voted and it is no surprise that the new Dolby Cinema at AMC Prime site and sound experience has earned tremendous guest satisfaction scores. As of September 30, we had eight Dolby Cinema at AMC Prime locations up and running and we expect to have eight more online by year-end. It's still early with the average age of the initiative just over 100 days, but operating and return metrics are meeting our expectations.

Since our focus is on being the guest experience leader and meeting and exceeding our guest expectations, I am proud to report that for the third quarter in a row, our year-to-date overall guest satisfaction results finished above 60, at 61. That is 230 basis points higher than last year, in the upper echelon of retailers and even more impressive when you consider the attendance increases we have seen this year. Our theater teams are doing a great job of making smiles happen in our theaters and without their efforts and those from our Theatre Support Center, these results would not be possible. So, a word to our theater teams and TSE Associates, thank you for your continued commitment to excellence.

Before we turn the call back to the operator for Q&A, let me provide you with an update on a few items we are asked about frequently when we speak to investors. First is the Paramount test.

As you may know, we have partnered with Paramount to test an innovative approach to theatrical and home entertainment release windows with two films, Paranormal Activity: The Ghost Dimension and Scout's Guide to the Zombie Apocalypse. This test is a welcome collaborative initiative between studios and exhibitors that sustain theatrical content exclusivity and consumer marketing focused on theater going while also enabling exhibitors to participate in downstream economics. Both films are now playing in theaters.

We're scheduling the films to satisfy guest demand and will await to assess the test until consumers have voted with their wallets. We believe this kind of innovative approach is important. Innovation is part of our culture and through innovation, progress is made.

Next, is the CEO search, which is progressing as expected. Recall that we had a succession plan approved and on the shelf at the time the Management transition was announced. So that plan was immediately activated. Our four US-based Directors have established the Search Committee and the executive search firm, Spencer Stuart, has been sourcing candidates.

We mentioned when we started this process that we felt it might take six to nine months to find the next CEO and I think that is still a reasonable timeframe. I want folks to understand that the Search Committee and Board will be very thorough in their review of the candidates. So if it takes longer than originally estimated, I think we all agree that we would rather the Board select the best candidate based on leadership, vision and merit rather on expediency.

I think the next topic we encounter is the Starplex acquisition. As you know, we have announced the signing of an agreement to acquire Starplex Cinemas which will add approximately 30 theaters comprising more than 300 screens to the AMC family. It is a great circuit with theaters in complementary markets where we believe there is value to be unlocked by deploying our strategic initiatives.

Exclusive of any one-time transaction costs, we expect the transaction to be accretive from a cash flow, EBITDA and earnings per share perspective in 2016 and beyond. Transition work is progressing as we await the usual and customary regulatory reviews and we continue to expect completion of the transaction by year-end.

Speaking of year-end, there has been a lot of discussion about the 2016 box office. I don't think you can talk about 2016 without talking about how we finish the fourth quarter of 2015. As I mentioned earlier, the prospects for a record fourth quarter and full-year 2015 are promising for both the industry and particularly, for AMC with our IMAX market share.

Two weeks ago, we began selling tickets for the IMAX title, Disney and Lucas Films Star Wars: The Force Awakens and we shattered our first day advance ticket sales record by a multiple of 10. We sold-out more than 1,000 auditoriums in the first 12 hours and we now have 30 theaters scheduled to be open 24-hours straight to meet guest demand on opening night. We expect those numbers to continue to grow.

With first shows at 7:00 PM on December 17, Star Wars box office impact will cross over into 2016. Just how long it plays remains to be seen but Q1, 2016, will also benefit from Star Wars and provide a nice jumping off point for 2016. The question is, by how much? I don't have an answer for that but I have high expectations.

We believe 2016 has the potential to be a very good year. We expect the tentpole movies to perform like tentpole movies and we also believe there is a breadth and depth of movie titles at the level below tentpoles with great potential as well. Regardless, we believe our focus on being the guest experience leader differentiates us from our competition as we seek to monetize each incremental guest visit to drive additional value for both our guests and shareholders. We look forward to the incremental contribution to revenues and EBITDA from the addition of Starplex.

Lastly, as investors look at our Company and evaluate our potential, we believe there may be an underappreciation for our cash flow generation. Just last quarter in Q2, investors focused on increases in film exhibition expense because of the concentration of films in the quarter drove film rent higher. What we fail to communicate clearly was that while that expense component increased, it also drove attendance, attendance that walked up to our concession stands and MacGuffins Bars and generates food and beverage gross profit dollars and margin.

These increasing gross profit dollars led to higher adjusted EBITDA and with our NOLs lowering the tax payments, our conversion rate of adjusted EBITDA to free cash flow is even higher. Free cash flow generation for the first nine months of 2015 has grown nearly 52% compared to last year. Now that is cash that can be used to reinvest in our existing assets, make acquisitions or return to shareholders. For the time being, we believe the returns on reinvestment in our theaters and acquisitions are more compelling and will continue to be our first choice for capital allocation.

To our guests and shareholders, thank you for continuing to choose AMC. We will continue to drive value by implementing our proven strategies across a growing base of theaters. We believe our future is bright for the remainder of 2015 and beyond and we look forward to seeing you in our theaters.

Thank you for listening and I would like to turn the call back to the operator so we can take a few questions.

(Operator Instructions)

Eric Handler, MKM Partners.

When I look at your concession revenue, you had some very good -- another quarter of strong increases with per-cap spending. I am just curious as we look forward here, comparisons are starting to get a lot tougher, I believe the tax on top strategy, I'm not sure if it is fully cycled yet but I think we are close, should we start assuming maybe some slower normalized growth rates or how should we think about concessions?

Maybe the best way to think about it is to try to give you a little bit more insight into the increase in the current quarter. We saw the concession per patron up very nicely, up about 6.8% to $4.58 from $4.29, so about $0.29 up. And as you split it apart, that $0.29, about half of it is initiative driven and that is coming out of our Freestyle rollout, our MacGuffins Bars, the fact that what we witnessed with new builds and our recliners is higher levels of spend, all of that, roles together to give about half of that increase.

The other half is pricing and probably a good share of -- we do take concession pricing. So you maybe split that in half and the half of the half, and you probably have accounted for the tax on top portion. And then the other half of the half is related to ongoing concession pricing that we take in line with demand. We did implement the tax on top strategy last year early in the fourth quarter, so to your point, we are in fact approaching the anniversary of that initiative.

Going forward, if you assume 15% you say -- 50% was pricing and 50% of that was tax on top. If we think about is normalized growth going to be around $0.075 per year and then whatever you have for initiatives layering on top of that, a little bit more above and beyond that?

So about -- this is Mike, Eric, about $0.15 came from initiative. I expect we still have quite a bit a runway there, I'd expect that to continue. And to your point, about half of the tax on top, that pricing, will continue but it is probably closer to the $0.075 that you mentioned than the $0.15.

James Marsh, Piper Jaffray.

Was hoping you could elaborate a little bit on your strategy with the Dolby Cinema? Maybe just talk about your thoughts on co-locating with IMAX, how you price it relative to IMAX, just generally where you see it fitting in the whole branding process?

As we said, we're early in the deployment of Dolby Cinema. We have eight Dolby Cinema at AMC Prime locations operational. We think there will be eight more by the end of 2015 and then probably a total of 50 by the end of 2016. So pretty early in deployment. We think of them as very complementary frankly, to IMAX. We do enjoy a great relationship with IMAX, have 150 locations and we benefit handsomely when those films are in the market playing well.

The Dolby Cinema at AMC Prime strategy allows us to broaden our base I guess of offering big site and big sound experience to movies beyond what may just be formatted for the IMAX presentation. It's certainly complementary in that sense that it gives us additional flexibility to play more films in a larger presentation format and also -- so not necessarily directly competitive with IMAX. From a pricing perspective, we think the two are comparable and offer very similar pricing of AMC -- Dolby Cinema at AMC Prime and IMAX. So priced pretty much competitively.

Quickly, what do you guys think we should model expenses for the film rental for fourth quarter? Where do you think that range should be?

I think you have some good history that probably should guide you. And that is, we have dispelled the myth that we were under some for of a secular trend coming out of the second quarter which was received all the scrutiny that we had set a new level or a new benchmark on film cost, when in actuality, it was more related to concentration of films. And then this quarter, when I guess -- as I recall in the second quarter, the top five films were 55% of the box offices and in this third quarter that has popped back down to 39%.

That maybe gives you two guide -- two fence posts to work within as you look at how much of the box office do I think is going to come out of the top five in the fourth quarter? And if it is close to 55%, then maybe it is similar to where we were in the second quarter. And if it is more normal to 39% to 40%, maybe it's more like the third quarter. I think the history is probably the best guide in this situation.

Ben Mogil, Stifel.

On the online ticketing, I am curious how you're thinking about the benefits. There's obviously some cost savings in terms of staffing, et cetera. What are you thinking -- are you seeing those online ticket buyers buy more food in advance? Are you seeing any incidence increase? I am curious (technical difficulty) the online ticketing (technical difficulty) and what do they actually mean from a business perspective?

Ben, your phone was breaking up (technical difficulty) and in fact, let me just ask the group, is it breaking up? I'm getting quite a bit of interference on this end. Are you all able to -- or back to the operator. Can you hear us?

Can you hear me better now?

Much better. I think I got your question.

(Technical difficulty) Basically the [coming] online ticketing, the numbers are great (technical difficulty) what I'm more curious about is when you look at those numbers, are you seeing customers other than some cost savings, are seeing or from a staffing perspective, are you seeing those customers come back more than the average customer? Are you seeing those customers buy more food in advance? So have a locked and loaded concession paddock? Curious how that is actually translating to the top and bottom lines?

Ben, I would say that -- what we like about online ticketing, it is it commits people earlier to the experience. And if you are sitting around chatting on a Wednesday or Thursday evening about what should we do this weekend and you start planning your activity and moviegoing comes up, it is usually always in the conversation, and you see something you like, you get online and you buy. You're much more likely to show up. So the conversion rate of intent to buy to actual attending, we think is positive. That is a good thing.

We do see our AMC Stubs loyalty members more active I guess then non-members in terms of using the online ticketing. The third point about food and beverage, we haven't seen a direct correlation between food and beverage buying and online ticket purchasing. We are -- we do have some initiatives planned we think that will address that opportunity. We think that is an opportunity and we can convert more food and beverage purchasing if we can bring that to life online. And more to come on that in the future. It's something we are definitely working on.

Just to clarify, (technical difficulty) screens that were closed at some point during the quarter and I think you said you will have about another 250 that will get renovated before Star Wars opens. Is that correct?

That is correct. 300 offline at some point during the quarter and we -- actually, this is probably one of the heaviest periods of construction. Most of those will open up before the holidays here in the fourth quarter. So we look forward to some nice contribution from those new remodeled, fully remodeled and recliner-reseated auditoriums.

(Technical difficulty), last point of the story, where do think the benchmark for box office was during the quarter for you from a weighted perspective given that screens were closed during the quarter? What do you think it approximately was?

The range has been 5/4 to 5/7. I think that is indicative of the benchmark. The other thing that we looked at, we weighed heavily to IMAX obviously, the IMAX premium format, IMAX was off almost 5%, 3D down 14%, but IMAX was off 5%.

If we adjust or pro forma industry stats for the IMAX format, our performance was probably 30 or 40 basis points ahead of the industry. At or above industry performance is how we thought about our box office performance this quarter, which really I think a big piece of it we were probably most interested or we paid most attention to, was the attendance driving that we were able to do.

Barton Crockett, FBR Capital Markets.

I was curious about the commentary on ticket pricing. You told us that you outperformed by 330 basis points in attendance, but I was wondering if you could give us the same-store trend in ticket pricing on your standard formats and premium formats? And if I (technical difficulty) compared to the industry?

Let me look at the -- let me walk through a little more granular how we looked at the ticket price. It was several things at play here Barton, and the first of all was premium formats, and I mentioned a minute ago they were down about 5% on IMAX and 14%. So not only were they down, we also had a product mix change. And by that I mean, the product was actually as I would say, more kid friendly when you had Minions and Inside Out driving your 3D box office. Last year it was Guardians and Transformers, which was a little more of an older audience genre, if you will.

The other thing that we did that impacted our ticket price is we actually did some promotions in some off-peak periods and we introduced a discount Tuesday, new discount Tuesday for our AMC Stubs members, for them. The combination came together and number one, it did cost us a little bit on average ticket price, but it really did stimulate the growth in attendance. Now to your question, the industry benchmark for average ticket price, we had it up about 2.1%. Attendance was up about 3.5%. That is based on what the industry is telling us.

So to understand the delta in the ticket price, I was assuming it was mixed. That you guys underperformed because you over (technical difficulty) to IMAX which underperformed. But you are saying it was actually there was another factor in there which were these discount programs, is that correct?

Yes. It is mix and it is also genre, which is mix as well. It is IMAX premium format mix, it is genre mix and we did some things with discounts. I would say it was promotional, really trying to push some lower capacity utilization time frames, trying to push some attendance to them and offered the Tuesday discount for our AMC Stubs members. That impacted us as well but clearly, the impact on attendance was dramatic as well.

When we look at you guys and I understand the relative performance, on the delta in your ticket price trends versus the industry, how much of it would you say was your promotions versus how much of it was different in mix that AMC chain versus the rest of the industry?

It's Mike. About $0.09 of it was related to premium formats. So a big piece of it was related to premium formats. The other $0.06 was the combination of mix and promotional pricing. Minions versus Guardians of the Galaxy than Planet of the Apes.

The other thing Barton, I didn't mention, is we actually have taken pricing early in the fourth quarter in advance of the holidays. As we look back to last year, we actually took pricing earlier in the year. So that would be in that other bucket as well that Mike mentioned. (Multiple speakers).

I'm sorry to keep interrupting but is this just a one quarter issue that's promotional activity or is this a change in the model that we should assume persists into the fourth quarter and beyond?

I would say so the AMC Stubs Tuesday night is a promotional period goes through at least the end of December. So we will continue to monitor that this year and decide if we want to go -- continue with that program. As I look at the quarter to date, we are tracking pretty well ahead of last year on average ticket price. I think last quarter was a little bit more anomalous.

David Miller, Topeka Capital Markets.

Craig, I just want to understand a little bit more about the dynamics of why you guys came in under the overall industry number? I know that you called out the dynamics from your -- the tough comparison that you mentioned in the third quarter of last year, but my understanding was that IMAX actually did very well on a per-cap basis in the third quarter as well. And in fact, Regal called out their IMAX business as one of the reasons they outperformed the overall industry benchmark on a calendarized basis. They had the calendar skew as you are aware of, but they did beat the overall industry number on a calendarized basis. I'm still not straight as to exactly why it is you came in under the industry benchmark? If you can flesh that out for me, I would appreciate it. Thank you.

One, not sure which industry benchmark you are looking at. The one that we looked at gives us about a range of 5.4% to 5.7%. But we're in at 5.7%. So we meet the attendance -- or we meet the benchmark of the industry. So I do not know how you are calling it underperforming the industry. We didn't.

Hold on. Admissions revenue per screen, you had said in your prepared remarks, came in up 5% -- 4.9%, 5%?

You are looking at it on a per-screen basis.

Right, that is correct.

5.7% So make so what is your assumption for the industry screens?

5.8%.

So you're assuming flat screen for the industry?

The industry is not growing, right? There is 38,000 screens in North America that has not really changed. On a capacity basis, the industry is not really growing. Your brand, your whole brand is centered around, in general, beating the industry benchmark. That is what you guys have done generally consistently since the IPO. This time, you didn't really do it. I know you came close.

If you look at box office, IMAX was down 5%, unsure what it was that you were referencing earlier, but IMAX was down 5%. We do have a 45% market share. We talked about some of the pricing. I do think looking at a 7.4% increase in overall attendance and if you look at attendance per screen, I think if you assume a 2% increase for industry pricing, which were the numbers that we were getting from (inaudible), I think you'd find that on an attendance basis, we outperformed the industry by a couple hundred basis points.

We can take it off-line. Just move on to the next question.

Mike Hickey, Benchmark Company.

A couple easy ones for you. Looking at Starplex, when you look at the recliner installations and your plan to rollout of additional recliners, you would assume that nearly 50% of that net worth would be installed with recliners. So curious, does that suggest that you're perhaps becoming more open to increasing your recliner penetration across your aggregate network? Or if there is something special within Starplex network that would allow a larger concentration of recliners versus your bogey for your total aggregate network? And then I have a follow up.

What drives our decision on number of screens that are feasible for remodel which includes of course, a reseat, is really the upside opportunity combined with the productivity. Lower-level productivity theaters have greater upside. Higher level productivity theaters, the upside gets progressively less. So there is a point given the seat technology that you are working with, where the numbers don't work. We think today, and I think it has been fairly consistent, that at about 1,851 of our screens will be suitable for reseat and that is based upon the technology that we have today.

I think your reference was Starplex, where we have talked about 80 screens already in the reseated format and an additional 90. So 170 of 340 screens. So you're saying, why is there's 50% and yours is less than that? It may have to do with the citing of their theaters, where they've cited their theaters, how old they are, they are generally pretty productive theaters. But it is the same math that we use on our theaters and it may well be that on average, our theaters are more productive than the Starplex theaters. But it is the same math that we'd used in measuring the size of the market, what is the upside opportunity and what is the level of productivity or performance of the screens as they exist today? Is that the essence of the question?

Fair enough. That makes sense. I apologize if I missed this in your prepared remarks, but when does the Starplex deal close? I think the original commentary was somewhere by the end of the year, but obviously it would be nice to close that deal before Star Wars.

Absolutely. We are still working with the Department of Justice. That process is ongoing. It is actually moving along as we expected. We hope to get some initial feedback over the next several weeks and based on the conversations we have had thus far, which have been very tentative, it is moving along as expected in terms of the number of potential overlap situations we will have to deal with.

We have set, we still would say, look, by the end of the year, that is a safe bet I think or a conservative estimate to how that might move along. To the extent we can accelerate it, going through the government process more quickly, we will. But as it stands today, we are sticking with our end of the calendar year 2015 target date for completion of the merger and bringing those assets online.

Chad Beynon, Macquarie.

Craig, you went into some detail on the returns on the reseats and the past you've talked about a five-year plan with the number of units in your core versus reseating. It looks like everything's going great now with the returns and you are not losing any market share to any new competitors in that space. Could you help us think about the cadence of the rollout over this five-year plan and also, if anything has changed in terms of the investment amount from you or your landlords? Just big picture, how you are seeing that?

Sure. We are about 47% of the way through the rollout. I earlier mentioned 1,850 as the target population. We have got 800 -- 860 I think today, 863, and so about 47%. Just under halfway. Two to three years remaining. And it is 200 -- 300 to 400 screens a year is the target or the pacing that we have set. Depending upon, to the second point of your question, landlords continue to embrace the idea, are interested in co-investing with us and so, that gives a certain pacing to the rollout because that does augment the returns when we can get 35%, 40% of the total capital commitment from landlords. I think it is steady as she goes.

The concept is continues to work well. Returns are well above our threshold. It is the number one return opportunity we have in terms of deploying capital into our circuit. Landlords continue to embrace it. We're continuing to work on opportunities to become more efficient in our deployment of seats and by that I mean, we currently lose about half to two-thirds of the seats. And we continue to work on opportunities to reengineer our seats to maybe produce lower percentage loss which could open up some more reseat opportunities at the higher levels of productivity in our circuit.

As I think about it is steady as she goes. We could accelerate a little bit but frankly, I think given our ability to work deals, the appetite of the landlords and the lease cycle underlying these assets, it all seems to work out pretty well at that 300 to 400 per year going forward.

A follow-up on that as well, the capital deployment versus your leverage targets. I believe your -- I think you said 3.6% in the prepared remarks or your presentation and you should probably bump that up a tiny bit until Starplex becomes accretive. How are you think about capital deployment in 2016 if there are more M&A opportunities available?

We will generate pretty strong free cash flow this year, 2015, a chunk of which, we will utilize to fund the Starplex acquisition based upon our -- how we think about 2016. We think the free cash flow generation can be yet again higher and we will have money to put to work and maybe more acquisitions to look at. They are hard to predict timing. Our capital deployment in 2016 will probably be comparable to what it was, where we think it will wind up in 2015. So fairly consistent levels which we'll have some excess cash to deploy into some acquisitions.

Jason Bazinet, Citi.

I had a quick question on the 863 reseats that you talked about. If you split that into markets where arrival of yours has not followed your strategy and those where arrival has followed your strategy, what have been the lessons that you have learned where someone has followed you guys? In other words, is it helping the aggregate attendance? Is it diminishing the ROI from that initial bump you got? Is there anything you can share?

Jason, it's Mike. We've seen some competitive activity. I would say, we continue to believe that these grow the market. So, we seen between 70% is movement from one theater to another with 30% growth in the market. That doesn't really change when you have new entrance into a trade area.

What I will say, is we have certainly seen the incremental attendance at our buildings, not as high, when you have got another competitor in the market. But what I would also say is we're still seeing returns well above our hurdle rates of call it, 25%. We knew quite some time ago, that we would expect that competitors would follow and we weren't underwriting these deals at 100% attendance increases and call it, 60% to 80% cash-on-cash returns. So they are migrating still well above our 25% hurdle rate but into the range as we would expect it.

The way I think about it Jason, is one, we can look at each of our market areas, we think with a fairly high degree of confidence, and we try to think of it as a mature market. What is the market look like when it is built out with recliners? Same way that folks would do in a new build deployment. We look and see what are the competitors, what is the landscape, what does it look like with reseat opportunities, what are the different theaters in the market and what does that mean for our capital returns when we deploy capital into our assets in those markets? We are trying to anticipate competitive activity because it is going to happen, it is happening, and to Mike's point, it does have some dramatic -- some impact on the returns in the attendance upside.

The other thing I would say is that generally speaking, we do think this is good for moviegoing. We think that a better guest experience, certainly at our theaters and certainly at competing theaters, is good for the industry and keeps moviegoing top of mind for everyone. Net/net it's good for our business and we try to take as intelligent of an approach as we possibly can by looking ahead and planning and deploying capital accordingly.

Eric Wold, B Riley.

Two questions. One follow-up to a previous topic. On the acquisition front, would you characterize your valuation of opportunities as proactive or reactive? Were you out there looking for targets? Are you going to talk to people who may not be the market yet or just waiting for the book to hit the desk before you take a look?

We are prospect, we're not reactive. I'm not going to tell you who. But you can wait til the phone rings or you can be out talking to folks. We like to be -- we like to sole source wherever we can. And as I said before, we are generating free cash flow. We want to put it to work. Free cash flow above and beyond our CapEx programs, our growth programs, so we need to try to cultivate those opportunities to the extent we can.

The last question, on the food and beverage, you had some food and beverage initiatives that you've added to theaters. If you look at the apples-to-apples addition to theaters, theaters that have MacGuffins, theaters that have dine-in Freestyle, is the incremental gain that you see on the food and beverage per patron pretty tight on an apples-to-apples basis? Or do have situations where there is a big range of results from one theater to the next and what have you found causes that an how do you get them all to the better end?

Certainly, the dine-in theater has the more dramatic upside to it, just the absolute spend on a per-patron basis on an enhanced food and beverage basis. Certainly the remodeled theaters and the recliners have, probably on a percentage basis, the next highest lift from their pre-remodel state. But that's I think a combination you are presenting more food and beverage options and just the overall experience is better. And I think when people are in a -- when avid moviegoers are in a facility that is well-presented, they probably tend to spend more.

Then I think as you look at the rest of the circuit, wherever you can put a bar in, wherever you get licensed for a bar, that is going to augment your food and beverage probably more than when you put in grab and go concepts. All lift, but you're going to get more lift out of a bar than maybe some of the more straightforward traditional approaches to enhancing your food and beverage sales.

I get that. Maybe I might have phrased it wrong. So what I'm trying to look for is, take for instance where you add a MacGuffins in, is the lift on a MacGuffins, basically the same for all theaters where you add a MacGuffins? Or do you have situations where some are minimal and some are way skewed to the upside and what causes that dynamic?

On a per-patron basis, you do have some variation but it is not that significant on a per-patron basis. Obviously the volume of the business -- of the building, will drive different results. But on a per-patron basis, there are significant with Freestyle, with MacGuffins, all those concepts are very similar.

Jim Goss, Barrington Research.

Just a couple. One, I was wondering, as you look at a full recliner reseated with Dolby Cinema at AMC Prime and a MacGuffins, and you get into the core urban markets, you are getting it seems to me a little closer to some of the specialty premium types like an iPic or something like that. Is there any sense or any notion that you might create some stratification and take advantage of perhaps the pricing disparities that you have been reluctant to do as you have executed on the recliner reseatings in some of the markets, at least in some of those areas where you think you might actually be able to split the difference a little bit and get some pricing lift from doing something like that?

I would want to debate a little bit the argument that we are reluctant to take pricing on our recliners. We've always talked about well, we wait for a year, I think that is depending upon the situation. We are actually accelerating the time post-remodel when we take pricing on the recliner remodels. Because it is fairly consistent market after market, the demand characteristics are there, the guest satisfaction feedback we get is positive. Jim, I would say we are more aggressive now than we have ever been in terms of the time in which we take pricing.

On our Dolby Cinema at AMC Prime, we have eight of them. To the extent we see demand growing and it is -- we are comparing back to what we modeled and what we thought, how they would perform financially and they are exceeding the projections. We probably can get to the same place that if we have demand that is exceeding what we had initially thought, it probably does give us an opportunity to push pricing a little bit more aggressively than we maybe initially thought. It is pretty early in that rollout at this point in time. But as we get closer to the end of the year and into next year, I think we will have much more -- will be up to 16, 17 locations, we'll have a much better sense of the overall acceptance and upside opportunity.

One last thing. In terms of MacGuffins, how many are there right now and is there any way to strip out their revenue and profitability impact from that initiative? Because that is a little bit different from the core theater operation itself.

As a MacGuffins?

Yes. Just of the MacGuffins.

We have 109 MacGuffins and -- a P&L on a MacGuffins difficult. You do have a lot of shared costs that would be tough to split out. So we have not spent a lot of time trying to do that because you are making more assumptions than I think the answer you would ultimately get to gets pretty diluted because of all of the assumptions you have to make on allocating costs.

I think that is it for our Q&A session. We want to thank you all again for joining us this evening. We do look forward to Q4. We have a lot of great initiatives. Looks like we've got a very strong product lineup to really finish out the year with a strong finish and potentially setting records for the quarter and for the full year. We look forward to talking to you again after the end of 2015. As we get the year end numbers all scrubbed up, we will be back to the early in 2016. And until that time, we look forward to seeing you at the movies. Thank you again very much.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.