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Executives

David Otto – Vice President of Finance

Kurt Hall – Chief Executive Officer

Gary Ferrera – Chief Financial Officer

Analysts

Alexia Quadrani - J.P. Morgan

James Marsh - Piper Jaffray

George Hawkey - Barclays Capital

Ben Shapiro for Ben Mogil - Thomas Weisel Partners

James Dix - Wedbush Morgan Securities Inc.

Barton Crockett - Lazard Capital Markets

Torin Eastburn - CJS Securities

Richard Greenfield - Pali Research

Eric Handler - MKM Partners LLC

National CineMedia, Inc. (NCMI) Q2 2009 Earnings Call August 6, 2009 5:00 PM ET

Operator

Greetings, ladies and gentlemen, and welcome to the National CineMedia, Incorporated second quarter 2009 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, David Otto, Vice President of Finance for National CineMedia, Incorporated. Thank you. Mr. Otto, you may begin.

David Otto

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 Security 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.

Kurt Hall

Thanks David. Good afternoon everyone. Welcome and thanks for joining us for our second quarter 2009 earnings call. Today I’ll be providing an overview of our second quarter operating results and an update on the marketplace. Gary Ferrera our CFO will then provide a bit more detail on our financial performance for the quarter and will provide specific guidance for Q3 2009 and the full year. And then as always we will open the line for questions.

We are pleased to report another quarter of growth in a difficult marketplace. Today, total Q2 2009 revenue increased 7.2% versus Q2 2008 and our Q2 adjusted OIBDA increased 5.8% over 2008. Our revenue growth reflected continued national market share gains and more than offset the effect of lower revenue across the rest of our business. Most notably as expected our beverage revenue declined 6.6% as a result of the reduction in time required in our founding members’ circuits to fulfill their reduced time obligations to Coke. This decrease in beverage revenue combined with higher network affiliate costs contributed to our OIBDA margin decline.

Our national advertising revenue excluding beverage increased 21.5% as we benefited from higher allocation of content partner spending in Q2 2009 versus Q2 2008, and expanded our client base as we continued to improve the quality and reach of our national network. Non-content national partner advertising revenue excluding beverage grew 8.7% in Q2.

Improvements in our network, most notably the addition of AMC Loews circuit that strengthened our coverage in the larger DNAs, are clearly aiding our strategy to broaden our client base. Several new clients are buying our network for the first time in 2009, including clients in the QSR, packaged goods, sports apparel, import auto and telecommunications categories. We are also starting to see interest in the technology area, a whole new category for us. It is important to note that certain of our new clients in the past had bought Screen Vision exclusively.

Strengthening our network remains a top priority in our effort to compete more effectively with broadcast and cable TV and other national advertising networks. We have already added 184 new screens to our network in 2009 through our agreements with our founding members, including the 82 Muvico screens acquired by CineMark in Q1. These screens have previously been a part of the Screenvision network and while only four theaters, they are highly attended with all four in the top 50 DMAs and three ranking among the top 50 grossing theaters in the U.S.

In addition to pursuing new network affiliates through conversations with several theater operators, we are also hopeful that our network growth will continue to benefit from M&A activity in the theater marketplace. In addition to the 400 Consolidated screens acquired by Regal in 2008 that will join our network in 2011, we continue to watch the National Amusements theater sale process and the Screenvision sales process with interest. Any favorable outcome from this market activity will add to our current market coverage and aid in our effort to compete more effectively for national advertising budgets.

While we have so far not been included in the Screenvision sales process, we continue to believe that a transaction would provide attractive expense synergies and a national advertising network that is more competitive in the national TV marketplace. This is especially true in the packaged goods, retail and QSR categories where we are significantly under represented from a spending standpoint.

While we currently have nearly 70 and 60% market share of theater attendance in the top 10 and 25 DMAs respectively, these significant spending categories in particular require even broader reach, with nearly universal geographic coverage for us to compete more effectively with TV and other national advertising platforms. While we continue to be interested in pursuing a transaction with Screenvision, we will continue to pursue the expansion of our network through relationships with other theater circuits.

Another testament to the quality of our network has been our ability to establish and renew long term marketing relationships with some of the largest media and entertainment companies. I am happy to announce that over the last several weeks we have renewed our content partner marketing agreement with NBC Universal, Warner Brothers, A&E and History Channel for another two years through 2011. These exclusive agreements not only provide us with two year commitments to apply our advertising on our network, they also will continue to provide us with high quality entertainment programming that ensures that our first look pre-show will continue to deliver a premium entertaining experience for patrons, and an increasingly effective marketing platform for our advertising clients.

As expected, our Q2 CPMs decreased as the supply-demand dynamics in the market are now clearly favoring media buyers. However, our ability to expand our client base and increase Q2 inventory utilization nearly 23 percentage points while saleable inventory increased over 18%, more than offset our slightly lower CPMs. While our CPMs continue to be much higher than average TV CPMs, softness in the TV mark pricing creates a bit of a drag on our pricing as broadcast sets the tone for the pricing environment for the sight, sound and motion advertising marketplace in which we compete. We expect that this softer CPM environment to continue throughout the remainder of 2009 and to result in near term quarter over quarter CPM declines as our over 15% CPM growth in the second half of 2008 will set a challenging benchmark.

Our national advertising business continued to perform well. As expected, our Q2 local advertising revenue declined as the increase in network screens available for sale by our local sales force was not enough to offset the softer marketplace. Having said this, while we continue to trail last year’s sales level, our local business appears to be stabilizing as we exceeded our internal Q2 targets and the rate of revenue decline versus the same quarter in 2008 has slowed dramatically from what we experienced last quarter. Our Q2 local revenue decreased only 6.1% versus Q2 2008, compared to the 19.3% Q1 2009 decline versus 2008. While our local business did decline on a year-over-year basis, our performance exceeded that of most local advertising mediums as we continued to benefit from the addition of several high quality theaters, strong box office and attractive audience. In particular, the AMC Loews theaters were strong local performers during the quarter.

Our combined meetings and events business experienced its first down quarter since we went public. Both our meetings, CineMeetings and Fathom division revenues were down during Q2 as our larger meeting clients appeared to be delaying their corporate events. And more of the Metropolitan Opera events were scheduled in Q1 this year than in Q2, and as such much of the Q2 revenue decline was related to the timing of the Met events. Year-to-date our meetings and events revenue grew over 9% versus the first six months of 2008 off a very strong performance by our Fathom division. CineMeetings revenue was down for the first six months as it was adversely impacted by the weak economy. While the soft economy is expected to continue to impact our meetings business, our second half of the year should benefit from a solid Fathom event pipeline.

Turning briefly to some of our future growth initiatives, our web initiative is beginning to gain traction with the Q2 launch of our new consumer website, ncm.com and related widgets. And we began to market and sell our online ad network. While the ncm.com traffic is still somewhat modest, our online ad network that currently represents 22 publishers in addition to mcm.com has nearly 30 million monthly unique visitors. This new online initiative provides our sales force with a unique, integrated bundle that can be sold separately or with our in-theater products.

While we have begun to close deals with interactive online agencies, we are not expecting our online initiative to be a meaningful growth driver in the near term. However, as media buying silos continue to collapse and clients increasingly look for integrated marketing solutions across multiple platforms, we believe that ncm.com and our ad network will be an important part of our future growth.

During Q2 we completed the restructuring of our investment in Idea Cast through an acquisition of 100% of its senior secured debt from its lender and foreclosed on certain assets that secured that debt. We then merged those assets into another out-of-home digital advertising company called [Dinew], a Kleiner Perkins Portfolio Company. As a result of this transaction, NCM became a minority shareholder in the new larger combined entity, while allowing us to continue to place maximum operating focus on our core cinema advertising business, while providing a potential growth engine to the future.

The new combined company will become one of the larger out-of-home digital advertising companies selling advertising across networks in health clubs, coffee shops, airports and airliners. While the digital out-of-home advertising business is only in its start up stage and continues to be very highly fragmented, this new partnership with one of the most successful venture capital investors will provide a platform to create the national scale and more efficient buying currency required by national buyers, much the way cinema advertising has evolved over the last few years.

I’m very pleased with our strong second quarter and first half performance as we continue to outperform other media platforms in a very difficult marketplace. However, we continue to operate in a very challenging business environment with difficult second half comps ahead of us and limited overall Q4 visibility as media buyers and the brands they represent continue to delay their final scatter buying decisions until the very last minute.

As Gary will discuss in a few minutes, given this late breaking scatter market we are providing a broader range with respect to our guidance for the year. While the next two quarters will be challenging on a comparative basis given our strong second half of 2008, we continue to make significant progress expanding our client base and shifting market share from TV and other national advertising platforms. With our expanding client base and our continuing network improvements, we are very well positioned for when the economy begins to recover.

Now I’d like to turn over the presentation to Gary to give you some more details concerning our Q2 financial performance and our financial guidance for the remainder of the year.

Gary Ferrera

Thank you, Kurt. I will now spend some time reviewing our second quarter financial performance in a bit more detail, as well as provide guidance for Q3 and full year 2009. You should note that the Regal Consolidated integration payment is not included in our operating results as those payments are recorded directly to our balance sheet.

The Regal Consolidated integration amount was $800,000 for the second quarter of 2009 and $1.1 million for the first half of 2009. Including the final payment specifically related to the AMC Loews theaters in Q1, total integration amount for the first half of 2009 totaled $1.2 million.

As Kurt mentioned, we had a great second quarter especially considering the current market environment. We outperformed our guidance range due to some very late breaking scatter dollars, some which came as late as the first week of June. For the second quarter our total revenue grew 7.2% to $92.9 million. Total advertising revenue increased 11.6% to $83.5 million, while meetings and events revenue decreased 21% to $9.4 million. The advertising revenue mix shifted in favor of our national business for the second quarter of 2009 and was approximately 70% national, 18% local and 12% beverage versus 64%, 22% and 14% respectively in Q2 2008.

Q2 national ad revenue excluding beverage grew 21.5% driven by a utilization increase to 81.3% compared to 66.2% Q2 2008, across an 18.3% increase in our Q2 impression [base]. While CPMs decreased to 6.2%, the strong Q2 2009 box office combined with the inclusion of a full quarter of AMC Loews attendees contributed to the larger number of saleable impressions over Q2 2008.

As discussed on previous calls, the time required for beverage advertising by two of our founding members in 2009 was reduced from 90 seconds to 60 seconds. This reduction was partially offset by the 8% contractual beverage CPM increase as well as the additional attendees provided by the strong Q2 2009 box office, and resulted in a 6.6% decline in Q2 2009 beverage revenue versus Q2 2008. While the economy continues to struggle versus the first half of 2008, the quarterly declines in our local business have begun to stabilize as our Q2 2009 local revenue decreased only 6.1% versus Q2 2008. The 7.9% increase in total average screen available for sale by our local sales force helped to partially offset a decline in same screen sales.

Total Q2 advertising revenue excluding beverage per attendee decreased only 1.3% to $0.41, despite a very weak ad market combined with a 16% increase in total attendees. National advertising revenue per attendee excluding beverage increased 4.7% to $0.32 per attendee in Q2 while Q2 local ad revenue per attendee declined by 19.2% to $0.08 per attendee, improving from a 27.1% decline in Q1 as we benefited from improving sales activity.

We entered the second quarter with approximately $2.5 million of make goods and as of the end of the quarter we had approximately $1.1 million of make goods, which is the same amount as at the end of Q2 2008. A very strong box office in the last few weeks of June helped produce the Q2 make good liability.

Our meetings and events revenue decreased 21% to $9.4 million from $11.9 million in Q2 2008. This decline is primarily due to weakness in the CineMeetings business and the fact that we held fewer Met events during Q2 2009 versus Q2 2008, as the timing of the Met events during the 2008-2009 season favored the first quarter. However, year-to-date our meetings and events revenue increased 9.1% compared to the first half of 2008.

Total Q2 adjusted OIBDA increased 5.8% to $45.3 million from $42.8 million in the second quarter of 2008, while adjusted OIBDA margin was 48.8%, down from 49.4% during Q2 2008. The margin decrease was primarily due to the lower high margin beverage revenue, the increase in our theater access fees associated with the addition of the Loews attendees, and the strong film schedule, higher network affiliate expenses associated with the addition of new network affiliates and one time professional service costs related to the Idea Cast transaction. These factors were partially offset by the increase in our high margin national advertising revenue and our efforts to contain costs.

Adjusted OIBDA including Regal Consolidated integration payments for the second quarter was essentially flat at $46.1 million compared to $46.5 million in 2008. For the first half of 2009, total revenue was $166.4 million compared to $149.4 million in the first half of 2008, an increase of 11.4%. This included advertising revenue of $143.6 million compared to $128.5 million in the first half of 2008, an increase of 11.8%.

Adjusted OIBDA was $72.2 million in the first half of 2009 compared to $63.5 million in the comparable period in 2008, an increase of 13.7%. Adjusted OIBDA including the AMC Loews and Regal Consolidated theater payments was $73.4 million for the first half of 2009 versus $68 million in 2008, an increase of 7.9% from the prior year.

Depreciation amortization increased $1.1 million from Q2 2008 due to increased depreciation related to investments in our digital network and the various network affiliate circuits and our ncm.com website, as well as increased amortization related to the increase in intangible assets associated with the annual founding member common unit adjustment. Net interest expense decreased $4.6 million from $15.1 million in Q2 2008 to $10.5 million in Q2 2009. This decrease was primarily due to a pretax non-cash accounting gain of $4.5 million related to the interest rate swap with Lehman Brothers and is considered ineffective for accounting purposes. This non-cash gain was due to a higher long term interest rate which also resulted in a decrease in our interest rate swap liability.

Looking briefly at diluted earnings per share for the second quarter, we reported GAAP EPS of $0.17. Excluding the non-cash gain related to the Lehman swap net of tax and minority interest, EPS would have been $0.14 for Q2 2009 versus EPS of $0.10 in Q2 2008, a 40% increase.

As of July 2, 2009 we had 16,848 total screens in our network including 2,333 network affiliate screens, representing a 1.2% decrease in total screens at the end of the second quarter versus the end of Q2 2008. Approximately 14% of our network is comprised of affiliate screens and approximately 92% of our total screens are connected to our digital network versus approximately 86% at the end of Q2 2008. These digital screens now generate approximately 94% of our attendance.

The slight decrease in total screen count at the end of Q2 2009 compared to Q2 2008 was primarily driven by the reduction of approximately 675 non-digital market screens from our network and offset partially by the addition of approximately 180 Cobb screens, 150 AMC Loews Star screens, 82 Muvico screens acquired by CineMark and some minor net organic founding member screen growth across our network. You should note that the market screens were not part of our digital network and were not available for sale by our local sales force as the local sales had been handled by Screenvision. Also approximately 400 Consolidated theater screens acquired by Regal during Q2 2008 will not be included in our screen count and attendance until 2011.

Our capital expenditures were $2 million for the second quarter compared to $3.7 million in Q2 2008, with a total of $4.5 million in the first half of 2009 versus $9 million for the six month period in 2008. We continue to estimate that 2009 CapEx will be in the range of $8 to $10 million assuming no additional network affiliate agreements are signed during 2009. This compares to $16.1 million in CapEx in 2008.

Regarding our balance sheet, all of our debt is held at the operating company, NCM LLC. Our total debt outstanding as of July 2, 2009 was $805 million, comprised of $725 million term loan, a $74 million balance on our NCM LLC revolver versus a $47 million revolver balance at the end of Q2 2008, and a $6 million non-interest bearing note payable to Credit Suisse associated with the Idea Cast restructuring. The revolver increase is due to our decision to draw all of our availability in light of the Lehman bankruptcy. The revolver balance net of NCM LLC cash and cash equivalents was approximately $47 million at the end of Q2 2009 versus $45 million at the end of Q2 2008. This net revolver balance excludes the effect of $34.3 million of cash at NCM, Inc. versus $16.3 million at the end of Q2 2008.

The $34.3 million Q2 cash balance at NCM, Inc. is reserved for dividends, income tax payments and tax receivable agreement payments to the founding members. You should note at our current dividend rate, excluding tax associated reserves, we currently have enough cash to pay approximately one full year of dividends. The average interest rate on our $725 million term loan was 5.9% for Q2 2009 versus 6.2% for Q2 2008. Approximately $550 million of our $725 million term loan due in February, 2015 is fixed under interest rate swap agreements at 6.7%. And the remainder is floating rate debt at 2.4% as of July 2, 2009.

The average interest rate on our revolver borrowings was 2.2% in Q2 2009 versus 5% in Q2 2008. Our pro forma net senior secured leverage at NCM LLC as of July 2, 2009 is approximately 3.8 times trailing 4 quarter adjusted OIBDA, including the AMC Loews and Regal Consolidated payments, which is down from approximately 4.2 times as of Q2 2008. We also announced our regular quarterly dividend of $0.16 per share. This dividend represents an annual yield of approximately 4.3% based on recent trading levels. The dividend will be paid on September 3, 2009 to shareholders of record on August 20, 2009.

Now turning to our Q3 guidance and annual outlook. For the third quarter we expect total revenue to be in the range of $94 to $97 million and adjusted OIBDA to be in the range of $49 to $51 million. This guidance is lower than the Q3 2008 adjusted OIBDA of $62 million, primarily due to a shift in content partner spend towards the first half of the year, as well as lower beverage revenue.

With respect to our annual outlook, we continue to experience a delay in national advertising bookings as marketers and media buyers are taking longer to commit advertising dollars as they monitor uncertain economic conditions. However, in both Q1 and Q2 we met or exceeded our targets as dollars were booked later in the quarter than in previous years. As a result of this late breaking scatter market, our total national advertising revenue including our content partner, beverage, cell phone, TSA and booked and pending scatter contracts is approximately 81% of our total 2009 national advertising revenue target versus approximately 92% of the actual 2008 national advertising revenue at this same time last year.

We are hopeful that some of the decline is simply due to timing. For instance, one client that funded a Q4 2008 buy aggregating $18.2 million from September through December 2008 had not yet committed for 2009 and recently notified us that future spending will likely be delayed to 2010. Based on these advertising market dynamics, we continue to manage our business based on the expectation that a late scatter market will materialize in Q4, resulting in our full year total revenue to be in the range of $360 to $370 million and adjusted OIBDA to be in the range of $175 to $185 million. While we remain hopeful that we can achieve the upper end of our guidance range, given our lower current bookings there continues to be some downside risk should the scatter market fail to fully materialize. You should note that this outlook for the third quarter and full year 2009 does not reflect any potential make goods being generated during Q3 or Q4.

That concludes our prepared remarks and we’ll now open up the lines for any questions you might have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Alexia Quadrani - J.P. Morgan.

Alexia Quadrani - J.P. Morgan

Just to follow up on your commentary about the vertical. I guess there are some clients that are pushing spending into 2010 or pushing back significantly on pricing. Is that limited to certain verticals? Have you seen that more pronounced in one or two verticals or is it across the board?

Kurt Hall

The comment that Gary made was really specific to one client, and it happens to be in the military category. So it’s really not something we’re seeing across the board. As I indicated we are obviously seeing a much softer pricing environment out there, so that’s pretty much across the board. But with respect to the comments that Gary made with the delay in spending that was one specific client.

Alexia Quadrani - J.P. Morgan

I think you mentioned in your opening about how you were seeing some new clients that were previously Screenvision customers that are coming to you, could you talk a bit about, I guess, how maybe their customer base maybe by vertical differs from yours? I guess is it dramatically different or not really? And maybe what kind of opportunities you can see going forward in terms of the new vertical penetration.

Kurt Hall

Well, clearly the nature of our network somewhat dictates, you know, the kind of clients you have. And I think clearly our network is much more [e-county] focused so there’s clearly times when clients that want more C&D county coverage will either buy us both or even, you know, in some cases buy just Screenvision. So I think the real nature if you will of the network itself sort of dictates that. But clearly, you know, I think both of us attract clients that are 18 to 34 focused because that’s obviously a big percentage of the theater going audience.

Alexia Quadrani - J.P. Morgan

And when you look at I guess the verticals that you’re beginning to penetrate that you highlighted that aren’t really what your core verticals historically, is there one or two that you really think could be as significant or core vertical down the road because they have expressed really an interest in sort of moving their ad dollars to theater advertising?

Kurt Hall

Yes. Look, we’re getting good pick up from everybody. As I said many times, a lot of this just has to be with sticking to the blocking and tackling of the sales process and getting more and more customers familiar with cinema, comfortable with your creative, comfortable with their execution in this new platform. I think specifically some of the interesting bright spots we’re seeing in the technology category, that’s been pretty interesting. Yes, and we’ve seen some good pick up in the sort of family restaurant area. So you know clearly those have been client categories that we have not [inaudible] action with until now.

Alexia Quadrani - J.P. Morgan

And just one last question, I’m sorry, I didn’t quite understand what you meant when you said you weren’t included in the process for Screenvision. Does that mean you haven’t been involved in it yet or you don’t think you’ll be involved in it?

Kurt Hall

The comment was based on we haven’t been involved with it yet. It’s a little hard for me to speculate whether we will or won’t.

Operator

Your next question comes from James Marsh - Piper Jaffray.

James Marsh - Piper Jaffray

I have a couple of questions here. First you mentioned that you renewed your content partner deal. Were there any major changes in the structure of that deal or is it similar to what it was before?

Kurt Hall

There are a few changes and I don’t generally want to talk about the specifics of our contracts with them, you know, but the basic overall structure was somewhat similar.

James Marsh - Piper Jaffray

And then could you just talk a little bit about the competitive environment overall with Screenvision today? And then just at the last a housekeeping item, if you could just quantify, you know, bigger than a breadbox the Idea Cast investment.

Kurt Hall

I think the competitive environment with Screenvision has not really changed since the day we started. You know we both compete in a very big marketplace and we’re both trying to shift market share from the television and other national mediums into our network. So, you know, I wouldn’t really characterize the competition as anything different than it has been.

James Marsh - Piper Jaffray

And then Idea Cast, can you give us a sense of what that investment was?

Kurt Hall

It was a reasonably small one and got a little bigger this year obviously because we invested in the restructuring that I discussed. But it’s still pretty immaterial in the scheme of things.

Operator

Your next question comes from George Hawkey - Barclays Capital.

George Hawkey - Barclays Capital

I just had two. The first is in a typical year, how closely correlated to the television up front is the marketplace for cinema advertising? And relative to this year, is it sticking close to that or is it as expected? And then secondly, given that the National Amusement Theater chain is on the block, if it’s picked up by one of the founding members how many screens does that represent as a potential pick up?

Kurt Hall

I’ll answer the last part first. I think the National Amusement circuit is somewhere in the neighborhood of 1,000 or so screens in the U.S. So I guess that’s the total potential. As far as the correlation, I’m not quite sure I fully understand the question. Clearly we have seen the up front begin to move more rapidly over the last couple of weeks. I don’t think it’s quite done yet, but it’s a lot further along than it was two weeks ago. We’re clearly, you know, seeing or at least hearing about roll backs in CPMs and some more significant were the smaller networks and so, you know, that sort of goes to my comment that I made before on the softer CPM pricing environment, which is clearly out there. There also appears to be a reasonably meaningful amount of money that’s being held back. In other words, the total dollar spending on the up front seems to be down and the numbers vary all over the place.

But it’s a reasonable amount of money. You know I think in the past we’ve sort of viewed that as being somewhat positive. That means there’s more money in the marketplace to compete for, the scatter marketplace. You know obviously we’ll have to wait and see whether that money actually comes back in the marketplace in the form of scatter dollars. It generally does, but I think a lot of that will be dictated by, you know, the speed at which the economy recover and/or clients faith in that actually happening. So I think all things considered, you know, more money in the scatter market is a good thing for us.

Operator

Your next question comes from Ben Shapiro for Ben Mogil - Thomas Weisel Partners.

Ben Shapiro for Ben Mogil - Thomas Weisel Partners

I just have two questions. First, I know you alluded to this earlier on the call. I was just wondering if you could give us any additional color around recent trends in CPM for local or national radio and TV and how that’s impacting your business specifically.

Kurt Hall

Well, you know, as I mentioned in my comments the overall marketplace is very soft from a CPM standpoint and like most of the media business it’s all supply and demand oriented. So when you have a big category say like the car category that stops spending money, that obviously has an impact on the overall marketplace. I would say that we’ve seen soft CPMs pretty much across the board and obviously reflected in our numbers as well.

Ben Shapiro for Ben Mogil - Thomas Weisel Partners

I remember from last quarter I think auto and military were holding up okay. Are you still seeing strength in those categories or?

Kurt Hall

Yes. The auto was actually one of our strongest growth categories in the second quarter. Most of that, but not all of it, but most of it was Asian auto companies. So we’re still seeing quite strong pick up in the auto category. I’ve already mentioned that, you know, the military they did spend in the first quarter with us. They have told us they plan to spend in 2010. The remainder of 20090 spending that I referenced before is looking somewhat doubtful.

Gary Ferrera

And telecom was pretty strong.

Kurt Hall

Yes, telecom was very strong in Q2 as well. That’s a good point, Gary. Thanks.

Ben Shapiro for Ben Mogil - Thomas Weisel Partners

It was kind of noisy in the background and I didn’t hear correctly. When you were referring at the end of the call to what percentage of bookings you had, I think it was in the 80% range compared to the 90% last year?

Gary Ferrera

Yes, 81% versus 92%.

Operator

Your next question comes from James Dix - Wedbush Morgan Securities Inc.

James Dix - Wedbush Morgan Securities Inc.

I just have two questions for you. First, as you look towards 2010 are there any categories which you’ve kind of been chipping away at during this downturn where you think you could get some, you know, upside surprise in terms of spending? And then second, I guess it goes a little bit to kind of quarterly variability. From time to time you’ve indicated that given the relatively small number of national spots you have, if you have a late cancellation sometimes that can lead to some quarterly variability. Do you have any strategy going forward as to how to reduce that? Or is that just a function of broadening and deepening, you know, the overall advertiser base?

Kurt Hall

Clearly that’s our primary strategy because with more clients that are buying your medium obviously the portfolio [kick] theory kicks in and you’re not as open to issues of somebody canceling or moving their ad. So that’s obviously the primary strategy. But we’re also building relationships with a number of different clients. They’re referred to in some cases as airplane deals. But we’re trying to build relationships where we can get commitments from people and we can actually place that inventory when there’s inventory available. Obviously that is at a fairly significant CPM discount, but it still is a strategy that television has used very effectively.

The other point I’ll make is that the one thing that television has been very reliant on over the last six to nine months is the direct response money. We really don’t deal in that industry at all. And it’s one of the strategies quite honestly just because of the quality of that content and the nature of the content. It’s not available to us and it’s been a big factor for television over the last few quarters.

There was one other part of your question. Oh, the other part was the potential new categories. Yes, there’s a number I think we have hope for fairly significant growth in the future. You know we continue to pick away at the packaged goods category. You know there’s some obvious big spenders in that category, big client names and we’re continuing to work very closely with those clients and making some progress. And hopefully we’ll have, you know, continued progress and breakthroughs in 2010. The insurance category we’ve sort of started to break through in that. I mentioned before the casual dining category, we’re starting to break through in that. So financial a little bit. I guess that’s part of the insurance category. So, you know, we are, you know, we are making really good progress. And as I’ve mentioned before, you know, we continue to grow some of the more traditional categories like the car category.

James Dix - Wedbush Morgan Securities Inc.

I’ve just got one follow up on that. I think you mentioned in the past some of the new categories might be more price sensitive than some of the categories you had on in the past. Do you think the dynamic of having Screenvision out there as a competitor has any impact on the ability to expand new category base in the sense that my understanding is they typically, you know, appeal more to a lower CPM?

Kurt Hall

There’s clearly going to be times where we’re just going to pass on a deal because we don’t like the deal or we’re fairly well sold, or we think we’re going to be fairly well sold. You know the whole decision on whether you take a deal that you may think is lower price is based on where you stand at that point in time. How long do you have before the flight runs, how much inventory you have available, all of those factors are very important. And then of course the category because there’s clearly certain categories, you know, generally buy television for instance at a lower CPM than other categories. And obviously as I’ve said before if we get into a point where people are making commitments to us where we’re able to place the inventory wherever we want, there will obviously be a lower CPM associated with that, you know, consistent with the way it’s bought on television.

Operator

Your next question comes from Barton Crockett - Lazard Capital Markets.

Barton Crockett - Lazard Capital Markets

I was curious about the comment that you mentioned about, you know, advertisers being interested, you know, perhaps in seeing more C&D networks on top of the A&B networks. You know markets where you guys have been strongest. And that makes me think about Carmike and the possibility of, you know, them joining your network at some point. You know they’re a big Screenvision partner right now. Can you comment on that? You know is there some possibility there? You know some eventuality where you think they could become part of your network?

Kurt Hall

Well, Barton, subject to the existing agreements that people have with Screenvision I think, you know, we’re going to be looking at most everybody that has a significant number of theaters. So I’m obviously not going to comment on any specific circuit and you are right, that Carmike does provide a lot of C&D county coverage. Now I just want to be clear, you know, we still have a lot of C&D county theaters. Clearly our concentration is much more focused in A&B counties. And generally and, you know, the military for instance is a very good example. They usually buy both of us and Screenvision because they want coverage across everything.

Barton Crockett - Lazard Capital Markets

And then as it sounds like you’re interested and continue to be interested in growing your affiliate network, is there a meaningful group of theaters that you think just do not want to be with National CineMedia because of your close tie to the top [sweet] theater chains and the idea that they’d be aligning with competitors in that instance?

Kurt Hall

You know I know that used to be the old thought and, you know, there probably are still a few out there that don’t like it. But I think at the end of the day what most exhibitors express is they want to just try to maximize the revenue potential for their advertising business in the future. But at the same time they want to make sure that what they’re putting in front of their audience is very, very high quality. And so, you know, it’s one of the reasons that we have focused so much attention on making the first look very high quality. And so I think the combination of obviously increasing income and making sure that they take care of their patrons, I think those are the two things that people look at the most.

We also get, you know, a lot of interest in our Fathom network because that’s incremental revenue as well. So to the extent that a relationship with us in advertising leads to some alternative content going into their theaters, I think that’s a good thing for the circuits as well.

Barton Crockett - Lazard Capital Markets

I wanted to ask a question about your guidance. You know, you guys, I was in print, you know, with estimates that you guys would beat the high end of your revenue and EBITDA guidance. You actually ended up beating my guidance here in the second quarter, yet you’re coming in with guidance for the full year that if anything suggests some easing some of your previous view that you could approximate last year’s revenue and EBITDA. Is there something that’s changed in your view of the second half that makes you more cautious now than you were a quarter ago? Or are you just, you know, continuing to layer in some conservatism in your guidance?

Gary Ferrera

Well, in Q2 as we mentioned on the call in the script we had some late break and scatter pop up, as late as the first week of June. Which as you can imagine is something that we just didn’t typically have before. So we, us putting that into our estimates would have just been, you know, irresponsible to try and to get to where the quarter came out. So, you know, we did when we made our Q2 estimates have some additional revenue in there that we hadn’t yet booked. We just didn’t have as much as came in because of that late breaking scatter.

And when you look at Q3 and Q4, Q3 late breaking scatter, you know, will again hopefully some of that will come in and we have projected some of that in there. You know, not an incredible large amount because obviously it’s August versus June and people away, so we may not see as much. When we’re looking into Q4, you know, it’s a very big quarter for us in the year. And we’re still quite a ways out and when we said, you know, we’re 81% booked and pending versus 92% there is still a ways to go. So the guidance range we’ve given we feel pretty comfortable with. Business, it’s all related to where the scatter comes out.

Kurt Hall

Yes, I will tell you the one client that we’ve now learned is likely to shift their spending into 2010 where we had thought previously that that spending was going to be in fourth quarter, that clearly has shaded our view a little bit. As we mentioned on our last call, that client had still not committed at that point in time and so we raised it on the last call because it was something that could vary our numbers in the fourth quarter. Now the good news is that we’ve got a lot of time between now and, you know, November and December in particular. In the past those months have been very high demand months. So, you know, we’re hopeful that our sales team will be able to get out there and sell it out.

Barton Crockett - Lazard Capital Markets

I’m not sure I heard it correctly. What was the number that that client was expected to spend that was pushed into next year? Was it $2.8 million? Was that the number?

Kurt Hall

We didn’t actually tell you. I think what Gary had said in his comments was how much that client spent last year, in September through December.

Barton Crockett - Lazard Capital Markets

And what was that number?

Kurt Hall

I think it was $18 million.

Operator

Your next question comes from Torin Eastburn - CJS Securities.

Torin Eastburn - CJS Securities

Most of my questions have been answered already so I just have two quick ones. Gary, you mentioned there could be some downside risk to the guidance. Do you think of downside as the lower end of the ranges you’ve given or?

Gary Ferrera

Yes, that’s what I mean. You know we put a wider range than we had last year just because of the visibility, and it not being as great in Q4. So we are pretty comfortable with the range we’ve put out. And if things go well, we hope to be in the high end range. And if the scatter market doesn’t materialize, you know, we’d probably be towards the lower end.

Torin Eastburn - CJS Securities

And then with the Department of Justice kind of continuing to be aggressive in terms of investigating and prosecuting cases, does that change your thinking at all about Screenvision?

Kurt Hall

No.

Operator

Your next question comes from Richard Greenfield - Pali Research.

Richard Greenfield - Pali Research

You know when you look at your, this is kind of a follow up on the last question or two questions ago. You know there has been a real decrease in visibility in terms of how far out people are booking. I mean you know one of the questions we just asked on a CBS call that, you know, where supposedly scatter’s pretty strong at least that’s what they’re saying, but the comment is that, you know, people don’t want to commit in the up front process because they just can’t commit far out anymore and they want to buy closer in, and that’s going to help scatter. And so given the fact that scatter is materializing later, it is possible, I just want to make clear, it is possible that you could outperform your prior guidance including this guidance and be above that range if you saw the same type of demand come in late like you saw in the second quarter. I know there’s obviously issues in terms of content partners shifting, but there is the potential if scatter is strong that you could do quite well versus the current range that you’re giving out. That’s question one.

Question two, is the reason that you’re excluded from the Screenvision process related to anti-trust or is it simply, you know, you think they’re waiting to see how National Amusement’s plays out? Or is this UBS doesn’t like you for some reason?

And then lastly, are there any remaining content partner deals that need to be re-upped over the course of the next year? Thanks.

Kurt Hall

I’ll answer the last one first. The answer’s no. We’re firm with everybody now through 2010. There will be some contracts that we’ll be trying to renew for ’11 and ’12 at this time next year. So the way we’ve laid those out approximately give or take, three of our content partners are in one series of two years, three are in the other and, you know, every other year. So that answers that question.

The excluded from the Screenvision thing, you know, look I’d be speculating, Rich and it’s always good not to speculate. We have heard that the owners are, you know, concerned about the anti-trust issue. We obviously have a different view but that doesn’t mean that we’re right or they’re right. So I think there’s also probably the possibility that it brings more interest into the process if we’re not there. Again I’m just speculating.

And then the visibility, look, anything’s possible. Clearly the last couple of quarters we’ve been able to exceed even our upper end of our range because of the late breaking scatter. You know the other thing as I mentioned a few minutes ago we’ve got going for us is that November and December have been historically very strong quarters. You know last year we stopped selling fourth quarter, you know, very early because we were so heavily sold. And in some cases I know we did turn some money away, and I’m sure there’s some money that we never saw just because we weren’t sort of accepting any new orders.

So, you know, anything’s possible. I just think in this business environment it’s prudent to, as we have done, create a reasonable range where if the scatter market doesn’t materialize we’re at the lower end. If it does materialize, we’re at the upper, you know, to use your words “if things go incredibly well, could we exceed that?” Yes, of course. But again I think as we have in the past we’re really trying to give guidance that we think we can achieve or exceed.

Richard Greenfield - Pali Research

I don’t want to beat a dead horse, but when you look at Screenvision is being owned by a financial buyer or someone else in the industry other than its current ownership structure, meaning not owned by National CineMedia, but is that better for you? Does it impact your thinking at all? Is that a good or bad event?

Kurt Hall

Well, you know, depending on what kind of capital structure they put in place and the pressure they have on generating higher CPMs and, you know, other things that they may do, you know, I sort of look at it on a neutral basis. As I said in my comments, we’re going to continue to pursue other theater circuits. Obviously if we were able to acquire Screenvision, that process would be a different process. But at the end of the day, it doesn’t really alter our thinking all that much.

Operator

Your next question comes from Barton Crockett - Lazard Capital Markets.

Barton Crockett - Lazard Capital Markets

I just had one other thing I wanted to come back on. You know based on some of my text, it looks to me like you’ve actually had very strong sell outs in July and early in August. And I was just wondering if that corresponded to what you’re seeing and if perhaps there’s a real skew here between, you know, the utilization, you know, perhaps going up year-over-year and the CPMs coming way down, or whether you’re seeing kind of a reduction in the seller rates as we get into later in August and September?

Kurt Hall

Look, the business has been quite good. And so I don’t think that, you know, there’s any doubt about that. I think clearly as we indicated last year and we’ve indicated already, last year’s third quarter was extraordinary. So, you know, everything kind of went right. So, you know, could that still materialize this year? Sure. But I think, you know, your checks I think were consistent with what we’re seeing. Clearly the variation in our numbers over the next six months are going to be driven primarily by utilization. You know clearly there’s going to be lower CPMs as we indicated, but the big, the big swing if you will is going to be our ability to sell more of our inventory. We have plenty of inventory. Even with a great second quarter of over 80% utilization, that still means we’ve got a lot of inventory left. And remember that 80% utilization is only calculated on 11 32nd units.

Gary Ferrera

And we’ve got up to 127% that we need to hit.

Kurt Hall

Yes. Yes. Mathematically 127% would be sell out, because we actually can go to 14 32nd units, and, you know, we’re only using 11 right now. We’ve got the extra Coke unit that we got back which makes it 12. And then we will oversell occasionally both segment one and segment two, so that puts us as 14. So when you do the math at 11 over 14, that happens to be 127%. So we’ve got enough inventory to meet demand. That’s, you know, that’s something that’s good.

Operator

Your next question comes from Eric Handler - MKM Partners LLC.

Eric Handler - MKM Partners LLC

As we look out to the back half of the year your local business was relatively stronger than most for local. Is that down 6.5, 6.6%, is that sustainable in the back half of the year or could we see improvements or should we see something more in line with the other local businesses?

Gary Ferrera

What we’re thinking, Eric, for the second half of the year is that the local business will be pretty much in line with last year to slightly up. Now that means on a per attendee or per screen basis it’ll still be down because we have more screens than attendees. But we think, we’re projecting and assuming that it’ll be sort of on line with last year to slightly up from last year.

Kurt Hall

Eric, as you recall, business activity in October pretty much shut down. And so our fourth quarter followed for the local business, followed what many businesses did. So we’re going to have, you know, somewhat easier comps in our local business, clearly a lot easier than our national business in the fourth quarter, because the shutdown of the economic activity affected our local business pretty directly.

Operator

Ladies and gentlemen, there are no further questions. I would like to turn the floor back to management for any closing remarks.

Kurt Hall

I really don’t have anything to say but thanks and, you know, I’m sure we’ll be talking to some of you with follow up questions after the call. All three of us will be here, so if anybody does have any follow up questions, please call. And thanks for everyone’s support and we’ll talk to you next quarter.

Operator

Thank you. Ladies and gentlemen, this concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.

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Source: National CineMedia, Inc. Q2 2009 Earnings Call Transcript
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