Good afternoon, ladies and gentlemen, welcome to the National CineMedia, Incorporated third quarter 2008 earnings conference call. Today's call is being recorded. Following the presentation, we will conduct a question-and-answer session and instructions will be provided at that time for you to queue up for questions.
I would now like to turn the conference over to Nikki Sacks with Integrated Corporate Relations. Please go ahead.
Thank you. Good afternoon. I'd like to remind our listeners that this conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
All statements other than statements of historical facts communicated during this conference call may constitute forward-looking statements. These forward-looking statements involve risks and uncertainties. Important factors that can cause actual results to differ materially from the Company's expectations are disclosed in the risk factors contained in the Company's filings with the SEC. All forward-looking statements are expressly qualified in their entirety by such factors.
Now I'll turn the call over to Kurt Hall, CEO of National CineMedia.
Thanks, Nikki. Good afternoon, everyone. Welcome and thanks for joining us for our third quarter 2008 conference call. Today I'll be providing you with a brief overview of our third quarter operating results and highlights of our outlook for the remainder of 2008. I'll also be making a few brief comments about out booking state for 2009. Gary Ferrera, our CFO, will then get into more detailed discussion of our financial performance for the quarter and our financial guidance for the remainder of 2008. Then as always we will open the line for questions.
We had another very good third quarter exceeding our previous guidance, with total revenues increasing 10.3% over a very strong Q3 2007, as solid growth in our non-beverage, advertising and Fathom businesses offset a decline in beverage revenue paid by our founding member circuits and CineMeetings.
We are also pleased to announce declaration of a third quarter dividend of $0.16 per share. We were very pleased with our current quarter growth, particularly in light of the softening of the national and local advertising marketplace. This performance was the result of a very good execution of our strategic goals as we successfully expanded our digital network and broadened our advertising client base and Fathom content offerings.
Our 15% growth in national advertising revenue, excluding beverage, in the current quarter, was driven primarily by a 17% increase in CPM year-over-year, as utilization stayed roughly flat at 93%. The only part of our national advertising business that showed any softness were our lobby entertainment network and lobby promotional products, as clients focused their spending on the big screen.
Our CPM growth significantly exceeded expectations due to a strong – due to strong demand from our clients who needed specific inventory in August and September and a favorable overall client mix. You should note that while our inventory utilization percentage was flat, excluding AMC Loews, we had a Q3 increase in saleable advertising impressions of over 3% versus Q3 2007, as we added additional network affiliate screens.
As we communicated last quarter, while some of our Q3 and projected Q4 growth is due to the 53rd week this year and the shift in content partner and other client spending to the second half of the year, we continue to add new advertising clients and categories.
During Q3, new clients were added in the existing apparel, broadcast and cable TV, movie studio, credit card, and retail client categories and clients in new categories, including tourism and transportation were added. This trend has continued into the fourth quarter as we have added first time clients in the travel and leisure and transportation categories, and for the first time an insurance client was added.
Based on our current quarter results and our future bookings, it appears that cinema may be continuing to gain market share of overall media spending as the softer economy and related advertising cuts appear to be more heavily focused on larger spending media that have been falling out of favor with marketers. As cinema advertising still makes up approximately 0.3% of total U.S. ad spending, it does not take much market share shift from other much larger mediums to create attractive growth for cinema.
During the quarter, we also began to make progress creating more flexible media buying options for certain client categories, including a modified remnant pricing relationship, where buying is being done on a week-to-week basis to fulfill unused inventory. Such alternatives are driving client – giving the clients the opportunity to try our medium on a last minute, short-term basis, creating less commitment risk for them, while allowing us to more opportunistically fill open inventory. While those CPMs are lower due to the last minute nature of these types of deals, it still provides an attractive return related to inventory remnants or partial network fragments that would otherwise go unsold.
Our local advertising business posted another solid quarter with year-over-year revenue increasing 9%. This growth was primarily related to the expansion of our theater network as local revenue of $0.10 per attendee was only up slightly from Q3 2007. You should note that the current quarter per attendee results were adversely affected by the integration into our sales process of several new affiliate – network affiliates and the AMC Lowes circuit.
Looking forward, general industry expectations are for flat to negative advertising growth across many local medium. While we are not expecting our local advertising business to be immune to the current tougher economic times, based on what we have experienced so far, our local advertising business appears to be more resilient to the slowing economic conditions than other local mediums. We believe that this is attributable to a – our strong value proposition for the smaller local businesses and our ability to reach an attractive audience with high quality, full motion video advertising.
Our ability to sell geographically around specific businesses allows them to target only customers in their trade area, providing a lower out of pocket expenditure and a more cost-effective targeted buy.
While our growth rate has slowed, especially in specific categories, such as auto and real estate, given the diversity of our client base, these categories only make up a relatively small portion of our business.
Our combined meetings and events business produced another quarter of strong growth, as revenue grew 18% year-over-year, and operating margins improved as we have been able to more effectively leverage certain fixed costs across both the Fathom and CineMeetings businesses.
The current quarter growth was driven primarily by our Fathom division, as it benefited from the expansion of our digital network, and in particular, our live broadcast capabilities to over 450 locations. This expansion has allowed us to increase the revenue and cash flow potential per event and attract more high quality digital programming.
Successful events during the quarter included the launch of the new Metropolitan Opera season that will include 11 live theater events over the 2008/2009 season, and live events featuring Glenn Beck and Warren Buffet.
We have recently filed an 8K relating to an amendment to our Fathom digital program agreements with the founding member circuit. This short amendment clarifies the definition of digital programming and provides the flexibility for the major studios to put digital programming into events, directly with the circuits, provided that MCM is paid a specified percentage of the ticket revenue. This agreement will keep MCM financially indifferent and could provide incremental revenue opportunities as the major studios begin to distribute more non-feature film digital content and bring more attention to this emerging new category of theater programming.
We continue to focus on expanding our digital network as our broader reach and better market coverage appears to be helping us deepen our advertising client base and attract more compelling digital content for our Fathom's event division.
As of the end of the quarter, third quarter, our network included 19% more screens than at the end of Q3 2007, with the addition of Kerasotes at the end of last year and Hollywood Theaters and AMC Lowes in Q2 of this year.
While we are continuing to discuss deals with several other regional operators that could further increase our network reach, our network already represents a very high percentage of the best theaters in the U.S. and theater industry attendance of approximately 70% of the top ten markets and over 60% of the top 50 markets.
In fact, based on unduplicated TV impressions for longer viewing periods, NCM is one of the larger media networks in America, providing unduplicated reach in excess of many well-known cable networks. This may be one of the reasons NCM has begun to find its place in mainstream media spending.
With cuts in overall media spending predicted for 2009, we will continue to focus our marketing – our sales and marketing efforts on shifting spending from other advertising mediums and through the introduction of new selling propositions such as those associated with the October 31st beta launch of our new consumer Web site, NCM.com.
Our new site extends our first look pre-show to the online world, providing a new platform – cross-platform selling proposition for both our existing national and regional sales force and a unique opportunity for clients to extend their media buys with us to their online budgets.
By leveraging our existing sales, enrich media production and distribution capabilities and the marketing impact of our big screens to drive traffic, we have been able to build and operate NCM.com with a very modest investment and minimal incremental operating and sales and marketing costs.
We are also creating ad net relationships with other entertainment sites that could provide an opportunity for them to upgrade their sites with our rich media widgets and leverage off our local and national sales capabilities. As we have just launched the site, we do not expect it to contribute meaningful revenue in the near-term.
Looking ahead, while the scatter markets continue to develop later, as clients assess the effect of the economic slowdown on their businesses, scatter demand has been strong for the upcoming holiday period. In fact, in a couple of cases, we have had to turn down Q4 deals, as only remnants to certain movie rating categories remained.
We are also encouraged by the upfront commitments for 2009 that are significantly ahead of those for 2008, at this time last year, and we have already turned down an auto deal for next May due to an existing contract that contains exclusivity.
For next year, we have approximately $36 million in total 2009 scatter commitments versus only $2.1 million of similar advertising commitments at the same time last year. In fact, we only had $20 million at the beginning of 2008. You should note that this excludes our content partner commitments, cell phone PSA, and beverage commitments, which are in aggregate expected to be in excess of 2008.
While the level of 2009 upfront bookings are encouraging, some of the increase in scatter bookings could simply be related to timing, as advertisers seek to reserve inventory and in some cases, category exclusivity for product launches or other marketing priorities that are time sensitive.
Our local advertising commitments for 2009 are slightly behind last year, as clients are making fewer annual or other long-term commitments to provide more flexibility in the slower economy. The majority of the upfront 2009 scatter advertising commitments have come from the foreign auto and retail categories. These pre-bookings illustrate the success of our sales strategy of creating an effective marketing platform for marketing events such as product launches for car manufacturers and other annual marketing priorities like back to school and holiday shopping periods for retailers.
While these type of event-related client relationships, along with our content partner, Cell Phone PSA, and founding member, beverage agreements provide an important reoccurring base of business for us, in order to reduce the quarter-to-quarter revenue and OIBDA volatility, we must continue to expand our client relationships to include companies that spend every week of the year to fill in lower demand time period.
Despite some encouraging early signs for our business for 2009 versus a relatively week first half of 2008, the current economic conditions are challenging in almost every industry, including that of many of our clients. To this point, while many of the upfront 2009 bookings are firm with no cancellation rights, some are partially cancelable with 120 days notice.
Also, given the weakened economy and strong CPM growth in 2008, we may start to see slower CPM growth in 2009, as we focus on increasing our inventory utilization on a higher impression base.
Fortunately, some of our larger client categories, like entertainment, telecom, and the military, appear to be fairing pretty well. While the level of future advertising spending beyond our current 2009 commitments is very difficult to predict given the economic uncertainty, we are hopeful that in these challenging economic times marketers will be even more focused on spending where they know that they will get positive and measurable results. This could bode well for cinema, as marketers know that their ad is being seen and is creating impact.
Now I'd like to turn over the presentation to Gary to give you some more details concerning our financial performance.
Thank you, Kurt. I will now spend some time reviewing our third quarter financial performance in a bit more detail. You should also note that the effect of the AMC Lowes and Regal Consolidated integration payments are not included in our operating results, as those net payments are reported directly to our balance sheet. The total AMC Lowes and consolidated payments for the third quarter were $1.5 million and for the nine-month period, they were $6 million.
For the third quarter, our total revenue grew 10.3% to $107.7 million, driven by a 9.9% increase in advertising revenue to $100.3 million and a 17.7% increase in meetings and events revenue to $7.3 million. This resulted in total Q3 adjusted operating income before depreciation and amortization or adjusted OIBDA of $62 million, excluding the AMC Lowes and Consolidated Theater payments, an increase of 9.7% for the prior year.
Adjusted OIBDA margin declined slightly to 57.6% from 57.9% in the third quarter of 2007. This margin decline related to the increase in on-screen revenue, offset by a decline in 100% margin beverage revenue, an increase in the percentage of our revenue related to the lower margin network affiliate agreements, and adjusted OIBDA, including the AMC Lowes and Consolidated Theater payments, was $63.5 million for the quarter.
Net income was $0.26 per diluted share for the quarter ended September 25, 2008, compared to $0.22 per diluted share for the quarter ended September 27, 2007. You should note that net income for the third quarter was positively impacted by a $2.2 million decrease in interest expense related to the accounting for the swap agreement with Lehman.
The advertising mix for the third quarter of 2008 was approximately 70% national advertising revenue, 18% local advertising revenue, and 12% beverage agreement revenue versus 66%, 19%, and 15% respectively in Q3 2007.
National advertising growth was driven by a 17.2% increase in CPM, while utilization was basically flat at approximately 93%. This consistent utilization was maintained while increasing impressions by over 3% from Q3 '07. You should note that while we have excluded the AMC Lowes impressions from the calculation of CPM and utilization during the run out period to maintain period-to-period comparability for reporting purposes.
The only area of our national business where we've experienced some weakness is in our national van [ph] and lobby promotions business. However, this accounts for only approximately 7% of our third quarter total advertising revenue.
The decrease in beverage revenue was due to the previously announced reduction in contracted beverage advertising time by one of our founding members from 90 seconds to 60 seconds.
We have been notified by CineMark and AMC that they are currently renegotiating the beverage agreements and believe they will reduce the contracted beverage advertising time by 30 seconds, beginning in 2009. Therefore, for planning purposes, we are assuming we will have a full additional 30 second unit to sell across our entire network as of the beginning of 2009.
We continue to see growth in local advertising in the third quarter, which was up 8.8% over Q3 2007, due in part to the increase in total average screen in our network.
Local advertising revenue per attendee held constant at $0.10 on an 8.2% increase in attendance and total advertising revenue per attendee increased by $0.018 – 1.8% to $0.56. The AMC Lowes attendees are included in this calculation, even though we did not have full inventory access due to certain run out divisions.
We entered the quarter with approximately $1.1 million in make goods. And as of the end of the third quarter, we had approximately $1.4 million of make goods, compared to $800,000 at the end of the third quarter of 2007.
Our meetings and events business also had a solid quarter, as revenue increased 17.7% to $7.3 million from $6.2 million in the prior year period. This was driven by a 43.6% increase in event count for the quarter, due primarily to the increase in our live broadcast capability which allowed us to attract more high quality Fathom digital programming content and provided an increase in the revenue per Fathom event.
Turning briefly to our expense line items, advertising operating costs increased approximately 240 basis points to 5.7% of advertising revenues due primarily to the increased size of our affiliate network from 9% to 17% of our total network screens.
Meetings and events operating costs decreased 360 basis points to 65.8% of meetings and events revenues from 69.4% in Q3 '07, primarily due to the leveraging of operating costs across both the Fathom and CineMeetings business and higher revenue.
Network costs increased slightly to 4.2% of total revenue due to the expansion of our network and cost associated with the launch of our internet business. Theater access fees were relatively flat year-over-year.
Selling and marketing expense decreased approximately 180 basis points to 11% of total revenues in Q3 '08, as a result of efforts to contain our costs in this area, including lower direct marketing and travel expenses and personnel hiring delays.
Administrative expenses increased to 5.8% of total revenue from 5.3% in Q3 '07, primarily due to the increased legal and accounting fees, business licenses, and higher personnel costs, all primarily associated with being a public company.
Depreciation and amortization has increased due to the increased depreciation on capital expenditures made to support the growth of our network and amortization expense recognized on intangible assets related to new theaters that were added by our founding members and the related issuance of NCM LLC units pursuant to the common unit adjustment agreement.
Net interest expense declined $3.3 million from Q3 2007 to $12.9 million in Q3 2008. This decline was primarily due to the $2.2 million credit related to a non-cash accounting credit related – sorry about that – related to the interest swap with Lehman Brothers and lower average market interest rates on the unhedged portion of our debt.
Year-to-date ended September 25, 2008, total revenue increased 5.6% to $257.1 million, including advertising revenue of $228.8 million compared to pro forma advertising revenue of $223.9 million in the first nine-month period of 2007.
Adjusted OIBDA was $125.5 million during the year-to-date period in 2008, compared to pro forma adjusted OIBDA of $128.9 million in the comparable period in 2007. Adjusted OIBDA, including the AMC Lowes and Consolidated Theater payments of $6 million for the year-to-date period in 2008 was $131.5 million.
My discussion on year-to-date information will focus on pro forma results that assume that the IPO and related transactions and the $805 million senior secured credit facility were effective as of December 29, 2006.
Our theater network continues to grow as we added new founding member screens and entered into new agreements with network affiliates. As of September 25, 2008, we had 17,204 total screens in our network, including 2,943 network affiliate screens, representing a 19% increase in total screens at the end of Q3 2008.
Approximately 88% of our total screens were connected to our digital network, which is consistent with the end of the third quarter last year. These digital screens continue to generate over 90% of our attendance.
This increase in screen count over Q3 2007 was primarily driven by the addition of approximately 1,000 AMC Lowes screens, 480 Hollywood screens, and 930 Kerasotes screens. The approximately 400 Consolidated Theater screens acquired by Regal will not be included until 2011.
Our capital expenditures for the third quarter were $4.6 million with a total of $13.6 million in the first nine months of 2008. We continue to estimate that 2008 CapEx will be in the range of $17 million to $18 million for the full year, with the capital expenditures primarily related to adding Kerasotes and Hollywood to our digital network and to a lesser extent, our internet initiative and recurring capitalized software development and IT costs.
Regarding our balance sheet, our total debt outstanding as of September 25, 2008 was $788.5 million, comprised of $725 million term loan and $63.5 million revolver, versus a $43 million revolver balance at the end of Q3 '07, and $59 million at the end of fiscal 2007. The increase in our revolver balance relates to our decision to draw all our available revolver in light of the Lehman bankruptcy and general credit market conditions.
The interest rate on our $725 million term loan was 6.3% for the Q3 period versus 6.9% in Q3 '07. Approximately, $550 million of our $725 million of term loan due in February 2015 is fixed under interest rate swap agreements at 6.7%. And the remainder is floating rate debt at a weighted average rate of approximately 4.6% as of September 25, 2008.
The interest rate on our revolver borrowings was 4.9% for Q3 '08 versus 8.4% in Q3 '07. Our average total interest rate, taking into effect of swap agreements was approximately 6.2% for the quarter versus 7% in Q3 '07.
Let me take a moment to discuss relationship with Lehman. While Lehman was one of our lead banking relationship and the administrative agent on our bank facility, the bankruptcy of the various Lehman entities has not had a meaningful impact on our liquidity.
In light of the Lehman bankruptcy and the more general issues surrounding the credit market, subsequent to the quarter end, we gave notice to draw all of our remaining commitments under our $80 million revolving credit facility.
All participants funded their pro rata share except for Lehman, who failed to fund $6 million of their $20 million commitment. Even without this funding, our total consolidated cash balance at quarter-end was $44.5 million, which is higher than historic levels, providing sufficient liquidity to conduct our operations.
In the near-term we do not anticipate repaying our revolver with any excess cash, as any pro rata amounts paid to Lehman will result in a permanent reduction of that revolving facility.
Also, as a result of the Lehman bankruptcy, any event to default – sorry – in event a default has occurred with respect to the $137.5 million interest rate hedge agreement, which is still technically in effect, the debt covenant requires 50% of a term loan to be hedged at a fixed rate. As of September 25, 2008, we had approximately 76% hedge or 57% exclusive of the Lehman portion of the hedge.
We are exploring options to replace Lehman with another bank. In addition, Lehman has remained the administrative agent under the revolving credit facility, and we've been advised by Barkley's that they are working to finalize a services agreement relating to that function.
Our pro forma lent leverage at NCM LLC, as of September 25, 2008, is approximately 4.1 times trailing pro forma fourth quarter adjusted OIBDA, including the AMC Lowes and consolidated payments. While we do not anticipate paying down our term debt, we expect to continue to de-lever over time through OIBDA growth.
Before turning to our outlook, I'd like to mention our dividend. Today, we announced our regular quarterly dividend of $0.16 per share. This amount represents a payout ratio of approximately 60% of the cash distribution to NCM, Inc., and an annual current dividend yield of approximately 7% to 9% based on recent trading levels.
Looking ahead for the remainder of the year, we now expect total revenue for the full year 2008 to be in the range of $364 million to $368 million and adjusted OIBDA to be in the range of $148 to $187 million – I'm sorry – $184 million to $187 million, assuming no new make goods are generated in the fourth quarter. In addition, we expect the combined amount of the AMC Lowes and Consolidated payments to be just over $7 million for the year.
While our 2009 upfront and other commitments are encouraging due to the current lack of visibility in the media marketplace, we will be giving Q1 and full-year 2009 guidance in early February.
We would now like to open up the line for your questions.
Thank you. (Operator instructions) We'll take our first question from Scott Barry with Credit Suisse.
Scott Barry – Credit Suisse
Hey, Kurt. I might have missed this; I hopped on late, but could you just remind us, typically, what percentage of your national advertising revenues are under contract by the end of the year? And then, secondly, how you see content partner allocations into '09 versus what was obviously a second half loaded '08? Thanks.
Yes. Last year, going in – right about at the end of the year, just before the beginning of last year, we were about 50% booked, give or take. Obviously, we aren't at that date yet. But given the comments we made earlier in the script, it could be – we could be higher than that. As far as the allocation of the content partner money, this year it appears as though it's about 33% or about a third in the first half of the year, about 66% in the second half of the year. Next year, it looks like it's about 50% first half, 50% second half. So, obviously, there is a favorable comparison there year-over-year going into next year.
Scott Barry – Credit Suisse
Okay. Great. Thanks.
Thank you. Our next question comes from Barton Crockett with JP Morgan Chase.
Barton Crockett – JP Morgan Chase
Okay. Great. Thanks a lot. Let me see. First thing, I was wondering if you could just remind us how much revenue are you looking to get in '08 from the content partners and the beverage and the PSA. And you said, I think, that you – those should be up in '09 over '08, but the beverage were losing 30 seconds from two of their theaters. First, I want to make sure I understand what the number is and what's growing. And it sounds like the content partners may be making up for a shortfall in the beverage side.
Yes. As we mentioned in the script, if you aggregate the Cell Phone PSA, which is committed obviously long term, the content partner commitments and the beverage, there will be a decrease next year in the beverage, and this year we had 90 seconds from AMC and CineMark and 60 from Regal. Next year we're anticipating 60 from all three. While obviously that reduces our commitment from them, it will provide a clean 30-second unit across the whole network; so value that however you want. Based on what we look – what we're looking at right now, given the increase in content partner money for next year, combined with the increase in the Cell Phone PSA that will offset decrease in the beverage.
And the CPM for the beverage goes up 8%.
Yes, the CPM in the beverage, as you know, contractually goes up 8% next year. So that obviously helps offset losing the 30s from CineMark and AMC. The answer to your first question, what we've said in the past, we've never given specific numbers for those categories. But what we've said is somewhere in the neighborhood of 30% to 40% of our revenue is contracted, associated with those categories. And next year, I assume that it will be around the same thing as it grows, and hopefully, our overall revenue base growth.
Barton Crockett – JP Morgan Chase
Okay. Great. That helps. And then secondly, I was just wondering if you could give us a little bit of commentary about the National Amusement situation. I mean, there's been press reports that there maybe some, potentially some ownership changes there and ScreenVision. Do you see anything there that could be an opportunity or something that could affect the theater advertising market over the next year?
Well, clearly, I've read all the same things you have. And trying to predict whether there'll be an M&A transaction in this marketplace is a bit tough at best. So I'm not going to comment on any of that. Clearly, if there was a trade or if the National Amusement circuit was sold and it was sold to one of our founding members, that would obviously mean over time it would be a part of our network. So that obviously has very positive implications for us. But I think it's a little too early to speculate about this, and we haven't spent a lot of time thinking about it, to be perfectly honest.
Barton Crockett – JP Morgan Chase
Okay. Well, in regards to ScreenVision, I mean, there has been some discussion by you guys and questions about whether there's a possibility of a combination between you and them at some point. Is that something that seems like less likely at this point, and if so, why?
I don't know if it's less likely. We've – we continue to remain open to discussions. We're always onboard for an accretive, attractive transaction. So always open for discussions. I think, clearly, as time goes on, and more circuits come over to our side and the Lowes effect begins to be more known, obviously, there's less financial value for us to do that. But, again, I wouldn't necessarily foreclose any of those options. Our focus right now continues to be, as it has been over the last year, to really try to bring some of the larger regional circuits onboard and we're talking to some now.
Barton Crockett – JP Morgan Chase
Okay. That's great. I'll leave it there. Thanks.
(Operator instructions) Our next question comes from James Marsh with Piper Jaffray.
James Marsh – Piper Jaffray
Two quick questions. First, I was just hoping you could follow up on ScreenVision and maybe just give us a little commentary on the competitive environment there. And then, secondly, just following up on the remnant sales commentary earlier in the call, if you could just give us a rough ballpark of what percentage of total inventory that might represent?
Yes, I'll answer the second question first. It's a very small part. Right now we just started doing it in the third quarter, and it happens to be with one specific client right now where they effectively call us up on Monday, if we have any available inventory on Friday, it may be for a week, it may be for two weeks or whatever. So the numbers are reasonably small right now, but it's a darn good start. We've been talking about this for a long time. These kind of deals are referred to as airplane deals in the marketplace. A real airplane deal would be one where somebody commits capital long-term or commits money long-term to this kind of booking. But it's a good start for us. It obviously has been a way to fill in some of the remnants, given our tight inventory situation, especially at the tail end of the third quarter.
The first – your first question in following up on the competitive environment with ScreenVision, it's actually been pretty quiet. There's been a few deals that there's been some back-and-forth by the advertising client or the agency between us and ScreenVision. But there seem to have been a real flurry of it and it may have been associated with Lowes going off their network and coming off – on our network in May. I'm sure there was a lot of activity on their sales force to try to get as much inventory sold as they could before they couldn't book that circuit anymore. But we haven't seen a lot. I guess at the end of the day we're seeing some positive signs on some clients that historically bought ScreenVision now buying us because they needed exposure in the Lowes circuit or just generally more exposure in the top 25 or top 10 markets. So some, I think, positive signs there. Some of the things we had hoped would happen are happening.
James Marsh – Piper Jaffray
Excellent. Then I have just one last follow-up related to the tax rate on the reported numbers. It looks like it was about 37%, down a little bit lower. How should we model that going forward?
Yes. The reason why it is, is obviously we only became a corporation fairly recently and we just finally filed our first tax return. So we, originally, we were in the 40% range as an estimate. The numbers we're looking at now are more in the 38% range, probably going forward.
I guess we also had a decline change in law effectively in Colorado.
Colorado State. That was last quarter, yes.
Our state taxes came down, actually. So that helped.
James Marsh – Piper Jaffray
Okay. Excellent. Thanks very much.
Thank you. Our next question comes from Rich Greenfield with Pali Capital.
Rich Greenfield – Pali Capital
Could you just give us a sense, I'm hoping you didn't say this; I was on the Disney call earlier. But what percentage of your business, just ballpark is autos right now and film studios? Those are two categories that some of the other media companies have kind of talked to as being weak, looking out over – obviously, autos have been very weak. But just what percentage has been autos? And if you could give us any sense of kind of domestic versus international within that. And have you seen any notable changes there or is this simply a share shift out of other mediums to you within those categories and that's really helping you outperform in this difficult environment? Thanks.
Thanks. I am disappointed you tuned into their call, and not ours, but I guess I can understand it. Anyway, the auto category has been a very big surprise for us this year. Clearly, a lot of the auto money we get is related to new car launches. We seem to be something that the car companies now sort of put into their budgets for new car launches on a reoccurring basis. Cinema's become a real staple in that respect, I think, for them. So we're obviously glad about that. We did have some domestic auto in the first quarter. That's dried up a little bit. Most of the auto now that we're seeing is Asian and European, primarily Asian. They've been very, very aggressive, and continue to be into '09, as I mentioned. And most of that '09 money, in fact, I think all of it is probably surrounding new car launches for next year, which I feel pretty good about just because I don't think the car launch are going to change. They're going to launch some cars. So you make the comment that is this share shift? I guess it is, if the money is not being spent in other mediums. So what was the other part of your question, Rich?
Basically the other part was about how much is sort of the advertising medium, that's mainly our content partners which we mentioned.
Yes. One of the things we said on the last call is that between auto, entertainment companies, very broadly defined as studios and –
– video games and television networks, cable programmers and so on. So the military, the car companies, and all of entertainment represented about 60% of our national advertising. We haven't given any other numbers beyond that.
Rich Greenfield – Pali Capital
And all I was looking for that exactly what I was referring to in my notes was, has that number notably changed as you look out? Are you taking share or simply diversifying? If those categories are in total, are those categories up or down and are you replacing it with new categories? Or is everything continuing to actually tick up year-over-year?
In those categories, everything is ticking up. We were able to bring on new content partner money from some of the entertainment companies, as we mentioned. So that's obviously a very good thing. In addition to that, we actually have gotten incremental money from entertainment companies that aren't content partners. So I would say the entertainment category is increasing. Oddly enough, the car category appears to be as well.
But again, focused on –
Yes, focused on launches and –
– On imports versus U.S.
Yes, imports for sure. Like I said, our first quarter had a lot of domestic money in it, but it pretty much dried up after that, which is consistent with what we're hearing in the marketplace.
Rich Greenfield – Pali Capital
And just last question. Do you have any sense, following up on an earlier question, of whether National Amusement has a change of control provision if Mr. Redstone has to sell that in a fire sale soon?
You mean change of control in what respect? You mean with respect to the advertising he has?
Rich Greenfield – Pali Capital
I really don't know, Rich. I've obviously never seen the agreement. I guess knowing Sherry and knowing that operation, I'm sure they negotiated a very favorable deal for themselves. So I have no idea.
Rich Greenfield – Pali Capital
(Operator instructions) Next we'll take a follow-up from Scott Barry with Credit Suisse.
Scott Barry – Credit Suisse
Hey, Gary, just a quick question. Obviously, yields gone way up with the share price decline. Could you just discuss what the leverage parameters are around your ability to continue to sustain the dividend? Thanks.
Yes. I mean, the covenant that we have, just big picture on the debt is currently 7.25 times. And as I mentioned earlier, we're levered at 4.1 times. In 2009, that'll be at 7 times. So by then if we hit the numbers that we mentioned, which we plan on doing, we'd be at about 3.9 times going forward. So we don't see any issues there. When you look at cash being distributed out of the LLC up to Inc., obviously, we have a few quarters of reserve sitting in Inc., so that it wouldn't shut anything down immediately. But those don't start until about 6.5 times leverage. The 6.5 times, it restricts us to 75% of the cash coming up. At 7 times, it's 50%, and at 7.5 times, all we can do is distribute to pay taxes.
Scott Barry – Credit Suisse
Okay. Great. And then, Kurt, just assuming this digital rollout eventually takes place at some point, what – just big picture, what do you think the impact if any is going to be on your business?
Well, I don't think there's going to be a lot of impact, to be perfectly honest. I think there may be some advertisers who think the quality of the projection is better, they're advertising because of it. I think at the end of the day, we've been selling digital for a long time and digital is digital is digital. There could be a little bit of a positive impact once we get better penetration on the 3D side. While clearly 3D is going to be a very positive event for the theater operators, I think it's going to be a little bit longer lag time before it becomes a significant thing for the cinema advertising business. You've just got to get too many people producing in a specific format to make the pre-show work. Otherwise, you get into this box where you've got glasses on, glasses off, and it's a very clunky way to deliver it. So you may get a few clients here and there that are at the tail end of the show or right before show time that choose to go 3D and that will build over time. And there could be a premium associated with that. When we started this business six years ago, people were still producing in non-high def 4x3 aspect ratio. It took us a couple years to get everybody 16x9 and high def. And I suspect we'll see that same thing once we have a 3D platform to get the advertising community onboard with 3D.
Scott Barry – Credit Suisse
Sure. Great. Thanks very much.
Thank you. And at this time, I'd like to turn things back to Mr. Hall for any additional or closing remarks.
I don't have much to say. I think the numbers pretty much speak for themselves. And I just appreciate everybody's patience, especially the long-term investors who have been with us since the IPO. It's been obviously a little bit of a rocky ride. And what we're doing is just keeping our head down and continuing to post numbers. We'll talk to you soon. Thanks.
That does conclude today's presentation. Thank you for attending and have a nice day.
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