AMC Entertainment Holdings, Inc. (AMC) Q3 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to the AMC Entertainment Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, John Merriwether, Vice President of Investor Relations. Please proceed sir.

Thank you, Latanya. Good morning. I like to welcome everyone to AMC's third quarter 2019 earnings conference call. With me this morning is Adam Aron, our Chief Executive Officer and President; and Craig Ramsey, Executive Vice President and Chief Financial Officer. Before I turn the call over to Adam, let me remind everyone that some of the comments made by management during this conference call may contain forward-looking statements, which are based on management's current expectations. Numerous risks, uncertainties and other factors may cause actual the results to differ materially from those that might be expressed today. Many of these risks and uncertainties are discussed in our public filings, including our most recently filed 10-K and 10-Q. Several of the factors that will determine the company's future results are beyond the ability of the company to control or predict. In light of the uncertainties inherent in any forward-looking statements listeners are cautioned to not place undue reliance on these statements. The company undertakes no obligation to revise or update any forward-looking statements whether as a result of new information or future events. On this call, we may reference measures such as adjusted EBITDA, adjusted EBITDA margin, adjusted free cash flow, and constant currency, which are non-GAAP financial measures. For a full reconciliation of our non-GAAP measures to GAAP results, please see our earnings release issued earlier this morning. In conjunction with our earnings release, we encourage you to review the supplemental financials for the 2019 third quarter that we published this morning on our website in tandem with the earnings release. After our prepared remarks there will be a question-and-answer session. This morning's call is being recorded and a webcast replay will be available in the Investor Relations section of our website at amctheatres.com later today. With that, I'll turn the call over to Adam.

Thank you, John. Good morning, everybody. Thank you for joining us this morning for a review of AMC's strong results for the third quarter of 2019, our enormous optimism for the coming six months ahead as we finish 2019 and start off 2020 both with a bang, and a progress update on several key initiatives in support of achieving the product, customer engagement, and financial targets that we laid out for you at our Investor and Analyst Day in April of this year. The third quarter of 2019 was another strong quarter for AMC. In Q3, AMC continued to outperform the industry on revenue and attendance per screen. In so doing, we drove significant top line adjusted EBITDA and free cash flow growth versus the year ago quarter. I’ll share more details on our results shortly, but first let’s start with a quick look at the industries impressive performance in the third quarter. The domestic industry box office for the third quarter of 2019 came in as most of you know at $2.8 billion, 3.6% higher than last year’s third quarter and 4.1% higher than the average third quarter over the past five years. Like in the second quarter of 2019, we continue to see a greater number of family friendly films led by the Lion King, which is as of this moment the second largest movie of the year. As a reminder, family friendly films tend to drive greater attendance in our sub urban U.S. theatres. In Europe, the industry box office also showed real strength in the third quarter of 2019, up 13.7% in the countries served by Odeon and Nordic on a constant currency basis. All in all, the cadence of the industry box office in 2019 is tracking exactly as we at AMC predicted a year ago. Starting with a weak first quarter, but followed by an impressive stretch in quarters two and three, ultimately culminating in what we expect to be a very strong fourth quarter, which includes the release of a whole host of superb movies including Star Wars: The Rise of Skywalker. As always, while we are encouraged by the industry performance in the third quarter, optimistic for the fourth quarter, and note that there should be a significant spillover effect into the first quarter of 2020. It is important to remember that there are natural fluctuations in the box office at an industry level between weeks, between months, between quarters. Therefore, our activity at AMC is geared to optimizing performance relative to our competition regardless of the ebbs and flows of the box office at large. To that end, we believe that AMC is extremely well-positioned and is behaving as the leader in our industry in having assembled the largest network of theatres globally in which we have prominently invested in guest enhancements, after guest enhancement, after guest enhancement combined with world-class marketing activity and our being in the midst of nothing less than a digital transformation of our company as we increasingly and seamlessly engage with our guests before dooring and after their visits to our theatres. So, let’s turn back to AMC in Q3, in which we had an impressive performance as evidenced by AMC’s continuing to well outperform the industry. In our U.S. markets, AMC set a new third quarter record in U.S. attendance of 3.8% this quarter to more than 61 million theatre visits. And for the sixth consecutive quarter, we noticeably outperformed the rest of the industry. The rest of the industry being defined as the approximately three-fourth of the industry that excludes AMC. On an attendance per screen basis, AMC indeed beat the rest of the U.S. industry on attendance by 270 basis points. U.S. average ticket price grew a healthy 3.3% versus the year ago quarter benefitting both from strategic price increases and a greater mix in IMAX and Dolby Cinema attendance. The result of our continued attendance outperformance along with robust average ticket price growth was that AMC outperformed the industry on admissions revenue per screen for the third consecutive quarter this time in Q3 by 560 basis points. Let me repeat that statistics. AMC beat the pack on admissions revenues in the United States per screen by 560 basis points. The story similarly a good one in our international markets. Supported by AMC’s commitment to an improved guest experience with our proven guest initiatives and theatre amenities at our European theatres, along with improved marketing activity by our company in international markets. Our international attendance was up 9.3%, compared to last year’s third quarter. Incidentally, the almost double-digit growth in European attendance combined with a record U.S. attendance also means that we set a global third quarter attendance record for our company this quarter in Q3 2019 of 87 million guests, up 5.4% versus the year ago quarter. In total, Q3 AMC admissions revenue globally was up 6.1%, up 7.6% in constant currency. The AMC’s third quarter story is not only bright on admission revenue, but also, we continue to see strong growth in record setting concession spending. With third quarter consolidated AMC food and beverage revenues per patron growing 3.4% to $4.82 and up 4.7% on a constant currency basis. Breaking this down by region, food and beverage revenues in the United States increased in Q3 some 4.7% to a third quarter record for AMC of $5.35 per patron, higher than any other major operator. While our international results in constant currency also grew by 7.4% to $3.77, which was an international third quarter record for us. In addition to our ongoing food and beverage initiatives, the strength in F&B revenue capture was supported by a sharper focus on innovation in the menu choices we offer towards theatre guests and strategic pricing actions taken in the latter half of 2018 and throughout 2019. As we’ve said previously, we believe that we’re still in the early to middle innings of capturing increased food and beverage opportunities and expect to continue improving food and beverage spend in both the United States and in Europe in the years ahead. On a consolidated basis, AMC generated 1.317 billion of total revenue dollars an increase of 7.8%, compared to last year and up 9.3% on a constant currency basis. In addition to our going for the gold in driving revenues, we also have been watching our costs and our margins. Accordingly, as a result of achieving company-wide third quarter attendance records and generating record food and beverage spend and marrying that with cost management, our margins did expand in Q3 of 2019, compared with a year ago. And AMC generated third quarter total adjusted EBITDA of $156.5 million, which is up a healthier 11.4% in constant currency from the year ago quarter, and up a particularly noteworthy 33.1% on a constant currency basis after adjusting out the non-cash impacts of ASC 842 on lease accounting. Adjusted EBITDA up 33.1% year-over-year. So, in Q3 of 2019, AMC generated $56.6 million of cash flow from operations, a $69.2 million improvement over the year ago quarter, again after adjusting for the impacts of ASC 842. Likewise, adjusted free cash flow grew by nearly $51 million year-over-year. It really was a very positive quarter for AMC. I want to take a moment here to note that the third quarter tends to be a seasonally low quarter for both cash flow and ending cash balance as our working capital items are impacted by the timing of certain studio payments. We expect these working capital items to normalize in the fourth quarter. Said another way, we expect healthy cash flow generation in the fourth quarter of 2019, and a strong ending year-end cash balance, add to it a wholly undrawn revolver, we have now and will have at year-end ample liquidity right in line with the expectations we have previously conveyed. Again, trying to encapsulated for you why AMC continues to overperform the competition. We believe that these pretty wonderful Q3 results are directly tied to what we have been calling with you this year, the AMC platform. AMC is delivering a personalized and targeted end-to-end experience for our guests, leveraging modern technology, and using data driven insights from our popular AMC Stubs loyalty program, which literally this very week should cross 22 million U.S. member households totaling over 50 million people on whom we have significant purchase histories at our theatres. Along with our wall loyalty programs comparable Stubs within Europe. As part of the AMC platform, we’re deploying innovative consumer engagement practices and state-of-the-art theatre experiences, this all creates a positive flywheel effect that encourages incremental attendance and incremental revenue and which holistically and synergistically drives incremental value for our guests, for our studio partners, and for AMC. Before we turn to your questions, I would like to briefly comment on six topics. First, on ASC 842 and lease accounting as we’ve been telling you for many months, we continue to believe that a considerable disservice is being done to investors by the rapid confusion in the market for followers of AMC and for the many other companies with the large operating lease portfolio. The data services, Bloomberg, FactSet, Capital IQ continue to wildly overstate our debt and are doing so inconsistently with U.S. GAAP. And as some of you have written extensively, ASC 842 caused us no change in cash, no change in interest payments, and no change in the operations of our business. We will continue to work with the data services pushing them to give investors more accurate information. In the meantime, we would encourage investors to take one of two approaches when looking at AMCs leverage and valuation ratios to ensure like-for-like historic comparisons. Either debt excluding operating leases should be compared to our reported adjusted EBITDA or debt including operating leases should be compared to our reported adjusted EBITDA adding back in to adjusted EBITDA our rent expense. Our finance and investor relations team is happy to discuss this further with any of you, if you want more clarity one-on-one. Second, as we’ve done in past quarterly calls over the past year or so, let’s talk about A-List. We are now in the enviable position of being able to give you a superb update on the rip-roaring success of AMC Stubs A-List. We are well aware that owing to the spectacular collapse of some others in this space, Stubs investors will feel fearful when we initially launched what we were convinced would be our sustainable and successful AMC A-List program they were not quite as confident. I’m so pleased to report to one and all what a winner AMC has on its hands with A-List. We continue to have over 900,000 members and A-List membership is now at an all-time high. This is light years ahead of our original membership goals. A-List members currently represent about 16% of AMC's total U.S. submissions. Given our confidence in consumer demand for A-List, earlier this year, we had the intestinal fortitude to increase the A-List monthly price by 10% to 20% across the country to most of our members. That price increase went into effect for new members as of January 2019, but hit the 600,000 members who enrolled last year in A-List only in the second half of this year as last year when we launched A-List we guaranteed no increases to membership pricing for 12 months from date of initial enrolment. Remember too, that we are charging more than double for the A-List what it cost to join Cinemark's movie club and then in the summer of this year, Regal finally launched its own subscription offering. There were some who speculated that the combination of our price increases, Cinemark continuing dramatically undercut us on price, and a new Regal program could hurt us, not the case. Our membership base is solid, loyal to AMC, growing, and importantly profitable. As important is are the membership numbers, given the fixed monthly price so too is the frequency of visits to an AMC theatre on a per member per month basis. You will recall the frequency level was 2.86 in the first quarter of 2019 and 2.848 in the second quarter. It was 2.4 in quarter three, 2.4. We have previously indicated to you that when combined with all the other consumer behavior dynamics in A-List of incrementality, high margin food and beverage spending, and take along tickets of full price, the A-List program should be handsomely profitable if member visitations per month are in the sweet spot of 2.5 to 3 visits per month, and that’s where we are, right in the heart of central sweet spot bill. As a result, we can confirm to you that we are about 18 months ahead of schedule on A-List profitability. At the time of the program's launch back in 2018, mid-year, we originally postulated that we would breakeven on an A-List in 2019 and make money, but on A-List, but not do so until 2020. Now, we can confirm that A-List was nicely profitable in the just completed Q3. We also now expect that A-List will contribute $15 million to $20 million to full-year AMC operating income in 2019, and we can reaffirm our previous commentary about the run rate profitability for A-List looking ahead on a per member per month basis by the end of this year 2019. What’s more. We are finding ways to significantly enhance the A-List program for members, but doing so without materially increasing our costs. Just two weeks ago for example, we launched something that we call A-List entourage, were notable members, including family and/or friends can link their accounts. That way, one person can make a movie reservation and reserve specific seats for all in their entourage in just a single quick and easy booking transaction. Previously, each member had to book on their own. So, before entourage, let's say your spouse grab seat H5 for the 7:00 P.M. screening of Paramount’s Rocket Band. You would separately have had to rush out and then try to grab seat H6. Our guests being able to book multiple seats at once is so popular that already in just the first two weeks more than 60,000 A-List members have enrolled in entourage and linked up multiple accounts. And speaking of more to come in A-List, just a week from now, we will also introduce for the first time A-List gifting where someone can buy a three-month, six-month, or 12-month A-List membership for a family member friend or business colleague without having to disclose the credit card information of the giftor to the giftee. It’s no accident that we’re launching A-List gifting just in time for all those Christmas stocking stuff for you. In summary, on A-List, we remain ecstatic about the continuing ahead of expectations, ahead of schedule, positive and profitable performance of A-List and the increased loyalty to AMC it has created. It’s not the only reason for the surge in our U.S. theatre attendance, but it is certainly one of the major reasons. For the third topic to comment on, briefly I’d like to give you some more color on the $50 million profitability improvement program that we announced on the last quarterly call mid-summer. As you might recall, at our investor and Analyst Day back in April, we set out to you a goal to improve AMCs operating margins by up to 200 basis points. As a part of our commitment to achieving this target, we announced a profit improvement plan that we believe will contribute $50 million or more of operating income to AMC in 2020 through a combination of revenue and cost initiatives. There are literally dozens and dozens of identified line items to fund the cost savings and revenue opportunities outlined in our profit improvement plan. Let me share with you a few examples to put some meat on the bone of achieving our goal. During the just completed third quarter, we took the difficult step of implementing a reduction in force at our corporate headquarters in Kansas City to right size our corporate headcount by more than 10% to be more consistent with our vision of a leaner, but not meaner AMC. In Europe, to cutout costly duplicative above theatre overhead, we rationalized seven separate geographic territories each with their own centralized staffs to three geographic regions. UK, Ireland based in Manchester, Northern Europe based in Stockholm, and Southern Europe based in Barcelona where in each we already had a large and effective staff presence in place, both in the U.S. and in Europe those steps represented significant payroll savings. Another ingenious example, our marketing programs are so pervasive, our communications efforts are so constant and our mobile technology now so much more in use, like very quietly we have been successfully able to modestly shrink some of our theatre operating hours during the most off-peak or off-peak times. This appears to be getting us considerable savings on utilities and labor cost at our theatres, but in the grand scheme of things not depriving us of revenue. There just maybe no need to start a movie screening at 11:10 P.M. on a Wednesday night and ending at 1:30 A.M. in Oklahoma City, and for that matter in New York City when thanks to our improving technology and growing brand loyalty, we can now convince the guest to cheerfully attend 10 P.M. or 10:40 P.M. show start for the same movie instead. But in that illustrative hypothetical, a theatre gets to close a half hour or a full hour earlier. That saves us money and our staff gets more sleep, which in turn may lead to better customer service over time from more well rested and less stressed theatre teams. In the third quarter, we reduced show starts by 4.1% in the United States, reduced show starts by 4.1% in the United States, and yet we achieved an all-time attendance record for that same quarter and had the biggest increase in reported market share of any change in the country. This dynamic scheduling cuts both ways though. Getting smarter about knowing when to cut show times in the off-peak means we also are getting smarter about adding show times in the peak. So, when Star Wars opens in December, you can be sure that AMC will be going around the clock without interruption for days on end at major theatres all across the country. And more examples in the profit improvement plan. Just by adding, and I’m not a Robot security feature to our gift card database, that’s pretty obscure, it miraculously saves us hundreds of thousands of dollars annually. Putting some of our vendor relationships out for competitive bid is also expected to save us millions without reducing the quality of the goods or services that we procure. I will spare you every line item on the profit improvement plan, but I can tell you that we are on track to hit and potentially exceed the $50 million target for 2020. Fourth topic, AMC continues to be committed to innovation. By the start of the just completed Q3, all of our U.S. theatres and the AMC and AMC-Dine-In [indiscernible] offered reserve seating which is immensely popular to our guests. At the start of Q3, we also launched our new artisan films concept, which puts a halo and extra marketing around what we’re calling contemporary curated films into which we’re leaning in heavily. Yes, we show tentpoles, but there are plenty of really intriguing movies out there that we are especially highlighting. Like Universal's Yesterday, Warner's The Joker, Disney/ Foxes Ford versus Ferrari, Sony's Once Upon a Time in Hollywood, and movie after movie after movie like Judy, Bombshell, The Good Liar and The Current War to name just a few of the many artisan films that we are trumpeting. More innovation in Q3. We started showing professional football games on Sunday afternoons at about 100 of our U.S. theatres. The early returns on our blockbuster pricing test, which launched in August 2 in four major cities across the country are going very well and are experimenting with blockbuster pricing will continue. As we do in Europe, we are testing, charging a small surcharge of $0.50, a $1, and $1.5 depending upon the theatre on certain really big movie titles, at least for the first week or two of their run. And again, an innovation. Just two weeks ago, we introduced on our website and smartphone app AMC theatres on demand, the ability for our AMC Stubs numbers to rent or buy more than 2,000 of the latest release movies for home viewing. We’re the first and only U.S. theatre circuit to participate in more of the movie ecosystem by allowing us to participate in revenue streams at the home and in the theatre and we have the enthusiastic support of all the major studios in our doing so. Leaders lead and innovation at AMC therefore will continue. In Q4, or Q1, we expect it will start testing home delivery of our or own AMC perfectly popcorn and other menu items via Postmates, Grubhub or Uber Eats. What I’m suggesting with all these various concepts, many that are just in the design stage, some that are now being tested, and some that are now being widely deployed is that there is real imagination in energy and vitality, at work, and on display at AMC. There are in fact reasons why our attendance and our revenues are outperforming the competition. As I said, leaders lead. Innovation, along with adaptive creative new thinking, is part of a very ethos of AMC, especially as we transform ourselves digitally and engage with our guests more and more in offering our quintessential 21st-century style movie going experience. Topic five, just to hit quickly on our CapEx plans. As you may recall, on the last quarterly earnings call, being very mindful of our desire to generate adjusted free cash flow and to deleverage, we introduced new guidance last quarter for 2019 CapEx of $415 million, down from $450 million the target that was outlined earlier in the year. We also introduced 2020 CapEx guidance of only $300 million, which is reflective of the natural conclusion of the domestic CapEx cycle and in-line with the long-term targets we set out in our April Investor and Analyst Day of $250 million to $300 million over a three-year to five-year time frame. We are reaffirming those two numbers $415 million and $300 million today, indeed the CapEx is not expected to exceed $415 million in 2019 nor to exceed $300 million in 2020. One of the reasons why we’re comfortable containing CapEx these levels as we look ahead is that we already have recliner seats installed in 78% of our AMC branded and AMC-Dine-In theater locations in the United States. By the very nature of AMC Classic branded theaters, with ticket sales usually in the lower end of the range of between 200 to 1,000 tickets sold per day, visitation levels at our – these are smaller theaters, are simply not high enough to get an attractive financial return from sizable investment in added theatre amenities. We operate and compete differently among theaters within our Classic brand. So, adding our own CapEx monies together with landlord and partner contributions, we’re still able to commit significant resources to continue investing in our technology and to continue to investing in our large theatre network to make our theatres more attractive to consumers, especially doing so in Europe and the Middle East. As we identify growth opportunity and attractive high ROI returns, we intend to continue to capture them. And finally, topic six, I want to wrap up our prepared remarks in this call with a salute to two individuals by name for whom I have the greatest respect. This comes in conjunction with a well-earned retirement by our CFO, Craig Ramsey, at the age of [indiscernible], he won’t let me say his age actually, who will hit his 25th anniversary with AMC on February 1 of 2020. I think the world of Craig as to many of you was a story of history with AMC having served as CEO of this company for some two decades. Craig, in front of the people who know you, I cannot thank you enough for your [sage counsel], your confidence and your high integrity for your long-standing service and many contributions to AMC over the years. You have many friends; you will be missed. Craig and I have been working together on his eventual transition for some time. As a company, understandably given the crucial nature and potential impacts of the role, the CFO role, if filled well, AMC devoted great efforts to identify and recruit great successor as CFO, namely, Sean Goodman who joins us on December 2, just a few weeks from now. Sean is the CEO of Fortune 500 Asbury Automotive Group, like AMC, also an NYSE-listed public company. He’s a CPA with auditing experience at [Deloitte], both in South Africa and in New York and a Harvard MBA. He worked for Morgan Stanley in London as an investment banker for many years and led several senior staff finance functions at Home Depot in Atlanta for many years as well. He is as smart as smart can be, a keen strategic thinker and a nice person to boot. I welcome him here to partner with me in guiding AMC, and especially to help us build back our share price to levels that we believe are far more commensurate with a potential earnings power and the bright future that lies ahead for our company. Sean and Craig will overlap together for about three months, making for what we all believe will be an easy, painless, and orderly transition. Undoubtedly, they will get out and about during that time period and will be able to meet with many of you. In summary, as we conclude, AMC had a strong third quarter. We are well-positioned for the future. And operator, we are now ready for questions.

Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from David Miller with Imperial Capital. Please proceed with your question.

Yes. Hi guys, congratulations on a great [indiscernible]. A few questions, I’ll get to kind of the nitty-gritty first, and then, add just an overall philosophical question. Adam, or maybe Craig, the non-cash expense entry on the NCM services agreement looks like it cost you guys about $0.08 a share. Surprised you guys didn’t call that out, if you could just kind of describe that entry for us that would kind of help flush that out? And then, it looks like rent expense was up 17.2% year-over-year, how much of that was ASC 842 and how much of that was just pure organic, you know, inflation? Then I have a follow-up, thanks.

Well, we’ll have to get back to you, David on the…

Congratulations, you stumped us on the first one.

Yes, on the NCM non-cash, I mean, there is some amortization. We’ll have to get in to it and look and get back to you on that. Your question about the ASC 842, the charge and – the comparable adjustment in 2018 for ASC 842 had been about $23 million on a consolidated basis, probably about 12 of that domestically in the balance on the international side.

Okay, fair enough. And then, Adam, do you still believe that the U.S. box office will end at a record this year versus last year? It looks like it’s going to be very close, it’s probably going to come down to Star Wars, but you did, I think make that statement perhaps two quarters ago, wondering if you’re willing to stand by that again. And then, also just wondering if you could size up the Saudi Arabian opportunity? To me at least, this looks like a huge multiple expansion opportunity for your stock price and just yet another massively underserved market around the world, and if you could just maybe count some of the population statistics about, you know, the fact that it's just a younger audience and they want to go to movies and so on so forth that would be helpful for us? Thank you.

Thank you. On the box office, we’re really not – you know people are trying to forecast 2020. It’s hard to forecast 2020 when you still can't quite forecast 2019. And it’s hard to forecast the next few months of 2019 when we’re all trying to figure out how next weekend will do. We’re really not going to know where 2019 ends up literally until Christmas New Year’s week. The film volumes are so big in December. We know the quarter is going to be big one. I think it's very unlikely that 2019, the domestic box office. Anyway, we’ll finish below $11.5 billion. I think it's unlikely that will finish above $11.8 billion, $11.9 billion. We’d hoped at the beginning of the year, this might be the first year to hit $12 billion. It seems pretty unlikely it will do that. We’re in that range, $11.5 billion to $11.9 billion, $11.6 billion to $11.8 billion, it really settles in. It really all depends on how individual movie titles grows over the next seven, eight weeks. As for the Middle East, I was just there last week. I'm going back in six weeks. The story has enormous promise for us. We have a single theatre open in Riyadh. It’s currently doing 11 times the revenue of a traditional AMC screen in the United States or Europe. 11 times the average seat utilization per year at that theater in Riyadh is more than double, the highest grossing in the United States, which happens to be an AMC theater by the way, Empire 25 at Times Square. We signed a joint venture agreement with the public investment fund, and an affiliated public investment fund, the sovereign wealth fund in that country to develop at least 40 to 50 theaters over the next four to five years. Our second theater, a 10-screen theatre, will open in mid-December. We expect to have somewhere between a dozen and 20 theaters open by the end of next year 2020. However, this is an affluent country of 33 million people. It has the 20th largest economy in the world. They like going to movies. They do it now by driving to Bahrain or flying to Dubai to see movies. They see movies when they travel outside the country. They see movies at home by satellite dish, and as we've proven, when we open theatres, they come to our theaters in huge numbers. We agree with you, it's a significant opportunity for us and we've done it in a capital light way. Most of the capital for our expansion in the Middle East is being provided by our sovereign wealth fund partner.

David, I actually – now focused on your question a second.

You’re back to NCM?

Yes, back to the NCM non-cash charge, really what’s going on there is when the company was formed years ago, there were some upfront payments that were collected by the forming partners, one of which was AMC of course. That money was deferred and amortized over the term of our ongoing agreements and financial in the media. Last year, the accountant said, you need to break out an interest component of that amortization. So, really nothing has changed whereas the amortization was formally in our expense category, a piece of it is now pulled down into interest expense. So, there’s really no substantial or change of substance there. It’s just a reclassification, and most importantly, it's a non-cash item. The cash was collected long ago. This is a non-cash charge that’s coming through.

Got it. Thank you very much.

Our next question comes from Meghan Durkin with Credit Suisse. Please proceed with your question.

Hi, good morning guys. I’m wondering if you had any very early learnings on the AMC on-demand product. And why do you think AMC can be successful in the VOD space given Walmart is exiting this business? And then, I wanted to dig into your comment around optimizing the box office versus competition. What are the levers you can pull there? And how can we have confidence that you’ll outperform the industry in 2020?

We’ll do the second question first. Why should we – why should we continue to outperform the competition? Because we've been outperforming the competition depending upon which method you’re looking at, three quarters in a row or six quarters in a row. And if you look at all of the marketing programs that we have, we’re just so out in front of the pack. Stubs, you know, it had 2.5 million member households three years ago. It’s going to hit 22 million and it wasn't growing either. We redesigned the program. Three years later, it could hit 22 million households this month. We used to communicate to our guests, you know, emails like 50 million to 100 million times a year, when I say used to, back when Stubs had 2.5 million member households. We’re not communicating to our guests by email, text, SMS, mobile push notations, about 1.5 billion times a year. About half of our total AMC clientele now is enrolled in our loyalty program, Stubs and we’re making it very easy for them to buy our products through our upgraded website and smartphone app. Under the old website, that was here when I got to AMC three years, 3.5 years back, we were being visited on the web or on a smartphone app just under 100 million times annually. Depending upon the volume per month, our website or our smartphone apps are being visited between 50 – a low of 50 million times a month and 90 – in a high of 90 million times a month. We should be pushing in 2020 somewhere between 750 million and 1 billion visits to our website and smartphone app. We’re all reserved seating, making it much more convenient for our guests. Our theater network is in better shape, more theaters having been renovated, more theaters having been installed with recliner seats. I could just go on and on, but it really is this – it’s what we’ve calling the AMC platform. It is working. You know, A-List is just doing phenomenally well and we’re just so out and far in front of our competition. By the way, it’s not easy in an industry that’s mature to move market share around, and we’ve had the biggest reported market share gain increase in the country. So, that’s what we’ve been doing, that’s what we’ll continue to do. We’ll continue to do it well. We’re constantly innovating and I believe that all that is going to cause us to continue to be out in front of our competition. As for AMC on-demand…

Yes.

…AMC theaters on-demand, you know, we've only been out two weeks. It’s a little early to give you any forecast over two weeks. We always thought that we would start out very slowly. We have very little cash invested in this thing. A few million dollars to program it. We’re not spending a lot of money marketing it. We don't quite think we’re going to scare iTunes or any other people in the space already, but here’s what we do think. It's somewhere between 50 million and 90 million people a month who are interested in movies, are already coming to the AMC website and are already coming to the AMC smartphone apps, and if we can make it really easy for them to rent or buy movies on-demand for home viewing, phone viewing, tablet viewing, you fish where the fish are, and since we’ve got so many people interested in movies already coming to us and exploring our website, we think that just by accident we’re going to see a substantial number of transactions on each of which we make a positive contribution over it. So, that's why we think we’ll be successful, and yet, we think the business will be very small, at least when we start and we’ll see how we build over the quarters and years ahead. But why not do it, it was easy for us to do, and we launched and we ask all of you, just – got to be Stubs are enrolled, but go to our website or go to our smartphone app, there used to be two buttons at the top of every page, in theaters and coming soon, there are now three buttons at the top of the page, in theaters, coming soon, and on demand. We think that what we’ve designed is a really attractive slick-looking guest interface. We look every bit as professional, as other major players in the space, and as I said, it cost us next to nothing to do it. We’ll see how much revenue and profit it winds up adding to the bottom line. Studios are – by the way, and lastly, and studios are very happy with us doing it because it's just one more player coming in and helping in the ecosystem of their home entertainment business. We already have great relationships with all of our major studio partners to the extent that we can do more things that make their lives better, making their lives better, ultimately makes our lives better in the long run.

Got it.

Our next question comes from Chad Beynon, Macquarie Group. Please proceed with your question.

Hi, guys, good morning. This is Aaron Lee on for Chad. Thanks for taking my question. First, you talked a little bit about Regal subscription plan, since Regal launched the program, have you noticed any attrition in the markets where you guys compete? And then, can you talk a little bit about what you’re seeing from a labor or a payroll standpoint in cities? And do you think that’s putting any pressure on your margin initiatives? Thanks.

On the first question, Regal’s unlimited program, no, we haven't seen any impact really. A-List is healthy, strong, resilient, profitable, you know, how many wonderful adjectives can I come up with to describe A-List. It’s driving great incrementality in movie going, it’s driving great incrementality in food and beverage spending. A-List members are bringing people along in full price. We think – we know we’ve got a very strong program on our hands. We also would note that while – we also note that we launched A-List at a time when other unmentionable people were out there. We thought we designed our program in a really smart way. We know that we’ve been managing our program in really smart ways over the past 18 months. There is a reason why we put in a limit of three movies per week in the A-List program, and in the Regal unlimited program, theirs is truly unlimited. So, if somebody wants to see 25 movies a month, they can. Honestly, when you’re only charging $20 a month, $22 a month, $24 a month, somebody wants to see 25 movies a month, we’re happy to give all those people to Regal, you know, every single one of them. But to answer your question, no, there's been no competitive impact on us, we’re strong and we’re healthy. As for labor and payroll, Craig may have more detail, but yes, there’s no doubt. We’re in a multi-year trend of political decisions being made to raise minimum wage all over the country. That is costing us money, but that’s one of the reasons why we’re looking so hard to drive savings, real savings through the profit improvement program, and I gave you several examples where we are really cutting costs and there are dozens and dozens more examples that I did laboriously take you through. But net, we’re ahead of the game when you look at cost reduction efforts against labor and payroll expansion efforts.

Yes, I’d say that the wage minimum, largely due to the minimum wage changes that Adam referenced was probably somewhere between 7% and 8% in the quarter. I think, on a go-forward basis, we would expect them to be around 5%. So, yes, we’re seeing it. Most notably, just not to repeat Adam, but I think his example of how we really took a hard look at show starts as an example of optimizing our operating envelope without sacrificing revenue because we still outperformed on a revenue basis. Even with some cost pressures, we managed our business smartly and we saw margin improvement, and I think that's really the answer. Yes, there was wage cost. We did the right things to manage our business under those circumstances and we still improved our profitability.

Okay, great. Thank you very much.

Our next question comes from Mike Hickey with The Benchmark Company. Please proceed with your question.

Hey, Adam, Craig, John, congrats on the quarter guys, and Craig you’ll definitely be missed, but best of luck. I guess just two questions, it looks like your A-List stock sort of held through the first price increase. I guess the price increase I guess with some late adopters the impact you would expect on the total sub, if you can continue to grow that? Or do you expect a mild decline? And then the second question on one of your partners, National CineMedia, you know, changed their deal with some of their founding partners, including Cinemark to allow ads post showtime, which I think is pretty common and international markets also, I think, happening with the competitor domestically, the Screenvision, and you guys were pretty vocal that that’s not something that you want to participate in, so I’m just sort of curious your thoughts there and why you decided not to do that?

Sure, so let’s talk about A-List first. Yes, it’s all good for A-List. We – the membership growth is way ahead of where we expect it to be at this point. I would expect that we would continue to grow our A-List membership. I don't think we’ve flattened out to a point where we’ll decline in membership, but I do think the growth going forward is going to be much slower than it was in the first, you know, six to nine months when we’re in a ramp up phase. You know, the price increase is a factor, competition is a factor. I think the biggest factor is just how big this market size is. When we launched the program back in June of 2018, I actually speculated that we – that if we got to 1 million members it would take us two full years, but that we might not ever get to 1 million members, provided size of the market at about 800,000 members for AMC. We’re already well ahead of that. I think we’ll continue to grow, but, you know, not at the exponential pace that we saw in the first nine months. As for NCM and advertising, there were two things that were in the NCM announcement. One is their showing ads five minutes after the official showtime start and the official showtime start is actually 20 minutes to 25 minutes ahead of when the movie actually begins because there's a big trailer package that shows in, you know, the 20-minute period prior to movie start. And a second issue, which is one to two trailers before the movie actually begins, call it 2.5 minutes to 4 minutes before a movie actually begins, they were to be inserting another 60 second ad right at the middle or the end of the trailer package right before the movie starts. We don't have any problem really with showing ads 5 minutes after the showtime start. It’s a long time before the theatre – before the movie begins in theater. But this thing about showing commercials right before the movie actually begins in the middle of the trailer package, that trailer package is extremely valuable real estate, and I would so much rather be advertising movies. The value of what we earn, both from the paid trailers where we’re receiving income from studios and from all the extra tickets that we sell for future coming attractions, that’s so much more than what NMC offered us to show and advertise detergent. We also think that – and know that our customers like seeing movie trailers, and we think they’re going to find it quite jarring to see an ad for an unrelated product just before showtime. So, it’s commonly done in Europe, but consumers are used to it in Europe. We don't – it’s not commonly done in the United States, and we think U.S. consumers are going to react pretty negatively to it. So, as the leader in the industry, we passed.

Thank you.

I might add, I’m convinced we’re going to make far more money from the sale of trailers to studios and the sale of tickets to films. By the way, we deploy our trailer time, we’ll make far more money from that than we would make if we accepted what NCM had offered us to show unrelated third-party advertising in that space.

Thank you. We have time for one more question and our question comes from Eric Handler with MKM Partners. Please proceed.

Good morning, and thanks for taking my question. Adam, you haven't really talked, excuse me, you haven't really talked much lately about the success of the re-seats in Europe and how those have fared? I think by now we’re sort of – a number of them have sort of anniversaried one year – the one-year mark, and wondering if you can just give us some color on how those are performing?

Thank you, Eric. The re-seats in Europe continue to be off the chart successful. We said on prior calls, we were seeing ROI returns of 50% or more, 70% or more. We’re seeing theatre revenues grew up in half. We’re seeing theater revenues double. There's no new news that makes us any less bullish on our investment in theatre amenity programs in Europe. You'll notice that even as we brought CapEx spending down, in total for the company, we’ve said it over and over again that we continue to see significant ROI opportunities, especially in our European and Middle Eastern theatres. I would expect we’ll do at least 15 theatres in the UK in 2020, for example, with full-blown theatre renovations including recliner seats. The whole investment thesis behind our buying Odeon in the first place, was to take a circuit with a strong brand name and great physical locations, but a fleet of theatres that were pretty run down, and invest significantly in improving the quality of those theatres bringing AMC style, proving guest initiatives over to Europe, that’s what we’ve done. We’ve got about 30 theatres done, we are going to add another 15 more next year and we’re off to the races. This has been a very successful initiative for AMC. It’s made us happy to have grown in Europe and it’s an all good news story. One that will continue, one that will continue in 2020 and beyond.

Great. Thank you. And just a quick follow-up with the U.K. market, it seems like you continue to have very rationale low pricing in the number of its markets, wondered how that’s been impacting you lately?

So, yes. One of our competitors has been pretty stupid, especially in the UK. We fortunately have been renovating theatres in the UK, so there has been no need to match their lowball pricing. As we've insulated ourselves somewhat by improving the quality of our theatres. There is a reason why we can charge a dramatic premium, you know when we launched Avengers: Endgame at the Odeon Leicester Square in London, we have variable seat pricing in commonly in Europe. We were charging $40 a seat to see Avengers: Endgame at the Odeon Leicester Square. And if you sat in the row box, which is on 24 seats, I think. 18 seats, I think, I don't know how big the row box is. We are talking $52 a seat to watch Avengers: Endgame at the Odeon Leicester Square. So, you can differentiate yourself via the quality of your theatres not just on price. But in others of our theatres, we got tired of them taking our pocket. So, if you look for example, our third quarter pricing internationally you will see that the price increase we picked up in the states, we did not pick up in Europe, but are getting down and dirty and slogging out with them, is one of the reasons why we are at 9.3% increase in attendance in Europe, and the end result of it was growing attendance, growing theatre admission revenues, growing EBTIDA, growing margins, so we think we got the formula right. Craig, you want to add?

Yes, I might add some context to – with a couple of data points. I think we mentioned, Adam mentioned on his call, his formal remarks at Europe, our industry was up a little over 13%. Our recliner segment of our circuit outperformed by a factor of three times that. So, that’s the – they are driving a lot of the growth we are seeing and there is, that’s clearly a portion of our circuit. I mean it is 25, almost 30 theatres. So, it’s not – it’s growing more important piece, it is the fastest growing and we’re certainly not forced or pushed to take price reductions there. In fact, we are optimizing our price because of the big demand that we are seeing on those remodeled reseated theatres. We are matching prices in some of our other theatres where it makes sense to us strategically to take some lower price, but certainly not on the remodeled piece.

Folks, we know that this is a big earnings season day. There are a lot of companies reporting. We want to let you get off the phone. Thank you for participating and joining with us today. And to sum it all up, AMC had a very strong quarter. We are extremely well-positioned. Looking ahead, we have every confidence in our future and hopefully you do to. Thanks much.

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