National CineMedia, Inc. F1Q08 (Qtr End 03/27/08) Earnings Call Transcript

| About: National CineMedia, (NCMI)

National CineMedia, Inc. (NASDAQ:NCMI)

F1Q08 Earnings Call

May 6, 2008 5:00 pm ET


Kurt Hall – Chairman, President and Chief Executive Officer

Gary Ferrera – Executive Vice President, Chief Financial Officer


Hunter DuBose - Morgan Stanley

Scott Barry – Credit Suisse

Ari Davis - Pali Research

Eric Handler - Lehman Brothers

Barton Crockett – JP Morgan

Lloyd Walmsley – Thomas Weisel Partners


Welcome to the National CineMedia, Inc. first quarter 2008 earnings conference call. (Operator Instructions) I’d now like to turn the conference over to Brad Cohen.

Brad Cohen

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 and Exchange Act of 1934 as amended. All statements other than statements of historical fact 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, Chief Executive Officer of National CineMedia.

Kurt Hall

Welcome and thanks for joining us for our first quarter 2008 conference call. Today I’ll be providing you with an overview of our first quarter results as well as our progress against our current year operating target and key growth strategies for the future. Gary Ferrera, our CFO, will then get into a more detailed discussion of our financial performance for the quarter and then as always we will open the lines for questions.

As we had expected, our total Q1 2008 EBITDA declined versus pro forma Q1 2007. While we continued to make great progress growing our national CPM’s and our local and regional advertising business and expanding our meetings events businesses it did not offset the EBITDA margin impact of lower national inventory utilization and lower beverage revenue.

While our Q1 national advertising inventory utilization of 58.7% was down versus the 71% in Q1 2007 it was significantly above the 48.5% in Q1 2006. We had expected a decrease as the national advertising inventory utilization during the 2007 quarter was significantly above planning with an increase of over 20 percentage points over Q1 2006. This strong Q1 2007 utilization growth was primarily related to a couple of clients who advertised heavily with us ahead of key product launches that did not repeat during the first quarter of 2008.

This quarterly volatility highlights the importance of our strategy to broaden the number of advertising categories and clients. While we are making progress in several large spending categories such as packaged goods and quick service restaurants, cinema is still underrepresented in their media plans. These two categories in particular are important as they buy media throughout the year and thus will help to reduce the risk of revenue volatility quarter to quarter.

As we continue to develop creative executions that work in the cinema environment and improve our value proposition I am confident that the cinema advertising will become increasingly important to clients in these underrepresented categories.

Although our overall national utilization declined our national CPM increased by 6.7% as we held the line on pricing and passed on certain contracts with unacceptably low CPM’s. Our average dollar commitment per national contract declined during the current quarter versus last year as we sold fewer 60-second and all-network units and our content partner’s first quarter spending allocation declined approximately $3 million or from 18% to 12% of their annual must spend commitment.

As these are must-spend commitments we expect this money to be spent later in the year. We believe that the slight drop in national scatter contract values is a short-term phenomenon rather than a developing trend that could be attributable to the general cautiousness in the marketplace relating to fears about the slowing economy. This view is supported by the fact that we have entered into 2008 and 2009 contracts with over 16 first-time clients in the auto, apparel, credit card and personal care categories and have increased commitment levels from several clients for 2008 and 2009 that ran small schedules or tested cinema in 2007.

Also we began multi-year relationships with new content partners, Warner Brothers, A&E and History Channel at the beginning of the quarter and Disney mid-quarter. This increase in our client base is a promising sign as it reflects the continued movement of media budgets from the traditional media platforms to new digital platforms like Cinema.

During the current quarter we also continued to make progress on our strategy to strengthen our network reach and market coverage, improving our competitive position relative to TV and other national advertising platforms. Effective April 1, 2008 the 480 screen Holiday Theater Circuit joined our network. This addition along with Lowes, Kerasotes and Goodrich will increase the size of our network beginning in June to approximately 17,100 screens and expand our market share in the top 10 and top 50 DMA’s to in excess of 70% and 65% respectively.

As our network grows we have noted an increase in advertisers who are seeking to create a new or expanded relationship with us. In many cases booking national multi-flight deals for later in 2008 and even extending into 2009. In some cases these first time clients have in the past committed their budget exclusively to Screen Vision.

In addition to our network affiliate growth we have continued to benefit from the new construction and acquisitions of our founding member circuits. While net screen and attendance growth will require us to make additional equity issuances it is accretive from a value standpoint as incremental attendees are being added at a much higher EBITDA margin than the company as a whole. In many respects it is no different than making an acquisition for equity where the synergies can be immediately realized.

Also our long-term right to have access to these theater additions ensures that our network will continue to strengthen and grow. While some older theaters that are being retired at the end of their leases are not included in the calculation the number of attendees is very low and in most cases those patrons go to existing theaters in our network. It is also important to note that we have a very unique business model with virtually no cash asset replacement costs.

Our local advertising business had another solid quarter with revenue up 14.3%. The only sign of the weakening local economy that we have seen is that certain clients have been less willing to sign up for annual or multi-month contracts. Our local business has appeared to be more resilient to the slowing economic condition than several other traditional local mediums. While some of this may be because we have not relied as heavily on real estate related clients, it may also relate to the ability of our clients to buy theaters only within their specific trade area thus providing a more effective buy while lowering the out of pocket costs compared to other advertising platforms.

Cinema is currently one of the only advertising mediums that can provide local and regional geographic targeting for full motion video content. Our regional business also continued to benefit from the increase in coverage of the larger DMA’s improving our ability to effectively compete on a reach basis with PB, newspapers and radio.

Our meetings and events business is also benefiting from the continued expansion of our overall network and our live broadcast capabilities. With the addition of new founding member theaters and new network affiliates to our advertising network we now have over 400 live broadcast locations in 145 markets. This expansion has allowed us to attract more high quality programming and build a meaningful 2008 pipeline as content owners benefit from the incremental revenue opportunity and revenue impact created by national release in theaters.

While not expected to provide significant near-term revenue and EBITDA growth, we continue to incubate a couple of future growth opportunities within two of the fastest growing media sectors. We plan to launch our new Internet site later this year and have recently restructured our IdeaCast investment increasing our current ownership to over 40% with that interest growing to as much as 80% over the next couple of years at an accretive early stage valuation.

As both of these initiatives leverage our existing technology, media production and sales infrastructure, NCM could be very well positioned should media buying silos consolidate around the higher quality digital media platform and we are able to offer clients a unique bundle of local and national digital marketing products across several digital platforms.

Looking ahead for the remainder of the year the Q2 TV scatter market has been very sluggish due to either up-front positioning by the networks and media buyers or the slowing economy or some combination of both factors. In addition we have passed on several contracts with low CPM’s particularly for the month of May.

While we have previously passed on deals with unacceptably low CPM’s, the discount and added value elements offered by Screen Vision has recently increased possibly due to the upcoming loss of Lowes on June 1. As many of these deals were often with large buying agencies that represent several clients, accepting these deals right at the time when our network was expanding and improving in quality did not make sense to us. While building our utilization to create better supply and demand characteristics continues to be our primary focus we felt that accepting these low effective CPM’s now could create long-term damage to our rate card and our future growth potential.

With our 6.7% quarterly increase in CPM’s and continued growth in our client base including several new content partners we believe that this is the right long-term decision even though it cost us some short-term revenue.

With these short-term issues with Screen Vision and the Q2 scatter market sluggishness, we continue to believe that the 2008 first half revenue and EBITDA comps will be challenging and making up for the 2008 first half consensus revenue and EBITDA shortfalls during the second half of the year could prove difficult.

Having said this, our book to advertising revenue for the year as a percentage of our annual advertising budget is consistent with where we were at about the same time in 2007. Thus as we integrate Lowes and the other new network affiliates, this larger and higher quality network positions us for strong year-over-year growth in the second half of 2008 and will continue into 2009 and beyond.

Now I’d like to turn over the presentation to Gary to give you some more details concerning our financial performance.

Gary Ferrera

I will now spend some time reviewing our first quarter financial performance in a bit more detail. You should note that the 2007 first quarter comparisons reflect pro forma results that assume that the IPO and related transactions and the $805 million senior secured credit facility were effective as of December 28, 2006.

In addition, you should also note that the effect of the Lowes integration agreement is not included in our operating results as those net payments are reported directly to our equity account. The Lowes integration amount was $800,000 for the first quarter of 2008.

For the first quarter our total revenue grew 1% to $62.7 million from $62.1 million. Advertising revenue declined 3.8% to $53.7 million from $55.8 million. While meetings and events revenue increased 45.2% to $9 million from $6.2 million.

The slower national advertising revenue resulted in a 19.5% decline in total Q1 adjusted EBITDA to $20.7 million excluding the Lowes payments. As mentioned previously this decrease in national advertising revenue had been budgeted as we do not expect to repeat the same national advertising utilization rate that we achieved in Q1 2007. Excluding the make good we would have comfortably exceeded our budget.

Adjusted EBITDA including the Lowes payment for the first quarter was $21.5 million. Adjusted EBITDA margin was 33% versus 41.4% in the first quarter of 2007 due primarily to a slight change in our revenue mix resulting from the decreases in high margin national and beverage advertising revenue, an increase in the percentage of total attendance contributed by our network affiliates. We were also able to offset some of this revenue mix with the tight cost controls as we delayed certain marketing expenditures and new hires.

The decline in total advertising revenue was primarily due to a nearly 12 percentage point decline in national advertising utilization partially offset by improvement in CPM, and increases in local advertising time sold. The lower beverage revenue was due to a slight lower founding member attendance and the reduction in Regal’s time provided for Coke from 90 to 60 seconds. This decrease was partially offset by the 8% contractual CPM increase towards beverage revenue.

As we expect to sell this premium unit at a much higher CPM than the contractual long-term rate, this change provides a future growth opportunity as market demand and our inventory utilization increases. During several sold out flights in 2007 we bought back inventory from Coke at a favorable spread and therefore we expect to sell this unit in several flights in the second half of 2008.

The advertising revenue mix for the first quarter of 2008 was approximately 60% national advertising revenue, 21% local advertising revenue and 19% beverage agreement revenue versus 62%, 18% and 20% respectively Q1 2007.

National advertising revenue per attendee fell by 12% from $0.25 to $0.22 due to the lower inventory utilization mentioned previously as well as an increase in attendees due primarily to the addition of new affiliate screens the majority of which were not digital and fully integrated into our sales process until late in the quarter and therefore generated lower average revenue per attendee during the quarter.

As we have mentioned in the past our national ad revenue and resulting EBITDA could fluctuate significantly due to one or two contracts. This is especially true in a low advertising inventory utilization quarter like the first quarter.

We were pleased with the growth in our local and regional advertising in the first quarter which was slightly above what we had budgeted and up approximately 14.3% over Q1 2007 with local revenue per attendee increasing approximately 9%. This was based off a 9.3% increase in the average number of screens.

We entered the quarter with approximately $4 million of make good and as of the end of the first quarter we had approximately $1.9 million of make good compared to $1.2 million at the end of the first quarter of 2007. January and February attendance was strong allowing us to make good much of the year-end balance, however approximately $1.1 million of the balance was requested by our clients to be made good in quarters beyond Q1 and an additional $800,000 in make good’s were generated in March due to the lower than projected attendance in that month.

Our meetings and events business continues to expand with combined Q1 revenue growth of 45.2% versus the first quarter of 2007. While this business is still a small part of our overall financial results it is providing additional EBITDA with very limited capital investment required. In addition, it is proving to be an important consideration for new affiliate circuits that are considering joining our advertising network.

Our quarterly Fathom revenue increased nearly 80% with a continuing success at the Metropolitan Opera and the surprise hit of the Spirit of the Marathon event. MET attendance increased 71% over the comparable Q1 period last year and the Spirit of the Marathon event had ticket sales approaching $1 million for two events. The success of this programming is now being shown in digital cities in advance of their summer marathon races.

While our cinemeetings revenue continued to be volatile quarter to quarter due to the number and size of events scheduled it had a solid first quarter with revenue growth of 12.5%. Our changes in sales personnel and more focused sales and marketing tactics appear to be paying off. We continue to make great progress expanding our network.

As of March 27, 2008 we had 15,419 total screens in our network of which approximately 88% were connected to our digital network versus 87% in the first quarter of last year. These digital screens generate approximately over 90% of our total attendance. Our screen count now includes 2,208 network affiliate screens not including the 480 Hollywood Theater screens that joined our network on April 1 and should be fully deployed in the third quarter.

Pro forma for all of our announced network affiliate screen additions and the addition of approximately 1,200 Lowes screens in June 2008 we will have approximately 17,100 screens and approximately 725 million attendees. In the second half of the year we estimate our network affiliate attendance will approximate 12% of our total attendance. As we have noted in the past revenue per attendee and EBITDA margins in affiliate theaters are lower than that from our founding member theaters.

On April 14 we disclosed the details behind the results of the annual common unit adjustment per our agreement with our three founding member theater circuits in an 8K. The overall result was the issuance of 2.5 million of additional common membership units based on an overall net increase in attendance of approximately 13 million. This resulted in a slight reduction of the NCM Inc. equity stake and NCM LLC from 44.8% to 43.6%. As mentioned previously we continue to believe that this agreement provides a long term accretive growth opportunity.

In addition to this adjustment we have also recently received a notice from Regal that they have completed the 400 screen Consolidated Theaters acquisition. Consolidated’s attendance is greater than the 2% of our total attendance. Therefore this acquisition will result in an extraordinary attendance increase as defined in the common unit adjustment agreement. The advertising for these screens is currently being sold by Screen Vision but Regal has elected to receive additional units and pay us [X insivity] run out payments until the end of the Screen Vision contract similar to the way that AMC paid us for Lowes. We expect to disclose more details in the next few weeks.

Our capital expenditures for the first quarter were $5.3 million versus $1.7 million in Q1 2007. This increase was primarily due to the digital deployment of Kerasotes and Colorado Cinemas as well as some costs associated with our Internet initiative. We estimate the 2006 [sic] CapEx will be in the range of $17-18 million. Much of the CapEx is related to network affiliate expansion and to a lesser extent from our Internet initiative and software systems development and upgrade. This estimate does include the expected capital from Hollywood Theaters network expansion but does not take into account any other potential network affiliate agreement we might enter into in the future.

Regarding our balance sheet our total debt outstanding as of March 27, 2008 was $774 million comprised of $725 million term loans and $49 million revolver. The revolver balance net of the NCM LLC cash and cash equivalents was approximately $45.1 million. The interest rate on our $725 million term loan was approximately 6.8% for the Q1 period while the interest rate on our revolver borrowings carried a slightly lower interest rate of 6% for the Q1 period. Our average total cash interest rate was 6.7% for the quarter.

Our pro forma leverage at NCM LLC as of March 27, 2008 is approximately 4.1x trailing four-quarter pro forma adjusted EBITDA including the Lowes payments. While we do not anticipate paying down our term debt we expect to continue to de-lever over time through EBITDA growth and do not envision dropping to a leverage ratio much less than three times before reevaluating our capital structure.

We also announced our quarterly dividend payment of $0.15 per share which is consistent with previous quarters. This dividend represents an annual yield of approximately 3% based on the current trading levels of our stock.

That concludes our prepared remarks. We will now open the lines for any questions you may have.

Question-And-Answer Session


(Operator Instructions) Your first question comes from Hunter DuBose - Morgan Stanley.

Hunter DuBose - Morgan Stanley

You absorbed a fair number of the [inaudible] screens I believe towards the end of last quarter and you didn’t really touch on this in your prepared remarks but is there any sense which getting the sales force up to speed with those screens tended to hold back utilization for this quarter and if so is that likely to reverse itself in the second quarter in which case we might see a bumped utilization almost being equal on that matter? Then the next question I have is there any indication right now of what the Consolidated Theaters run out amateur likely to look like in terms of size and magnitude?

Kurt Hall

We did mention it was kind of hidden in Gary’s comments that we added the Kerasotes and Colorado Cinemas during the quarter and we didn’t integrate it fully into the sales force until later in the quarter. I think your thought is correct that the utilization per screen, per attendee, however you want to look at it for those theaters is lower. It is the same delay we had pretty much every first quarter when we add new theaters to our network.

Gary Ferrera

On the Consolidated, we have gotten the notice so that we could run the attendance numbers. We still have to work through the details of the agreement over the next few days with Regal so we don’t have any estimates at this time. As soon as we get that just like with the last adjustment we will put out an 8K with details.

Hunter DuBose - Morgan Stanley

Formulaically though, is there any reason to believe it is going to be calculated differently than the Lowes payment was calculated?

Gary Ferrera

No, not in any material way.


Your next question comes from Scott Barry - Credit Suisse.

Scott Barry – Credit Suisse

A question on the affiliate ads. You have consistently surprised on the upside since going public. Could you talk about the value proposition there and what components of that value proposition are resonating with the affiliates?

Kurt Hall

From our standpoint in getting affiliates on board I think a lot of them have looked very carefully at the programming that is put on the screen and clearly that has been one of the biggest issues that people have had and obviously positive view on us. I think the First Look has established itself as sort of the benchmark if you will of high quality pre-show programming. So clearly that is one on the list.

I think the amount of money they are going to receive even though in some cases they may have been getting a higher guarantee, in fact in all cases probably, getting a higher guarantee from Screen Vision I think clearly there was an expectation there would be a better ability over time to grow CPM’s and they would be able to participate in that growth. So, I think clearly those were the two big things.

I think Gary mentioned in his remarks the fact we could deliver different kinds of programming whether it is the MET or some other types of programming is becoming a more and more important factor in putting additional butts in seats during slow movie going time periods.

So I would say those three factors are the biggest factors that affiliates are looking at. I think from our standpoint the value proposition is pretty clear. While the margins are lower associated with these incremental attendees it is incremental and the returns on investment are very, very high and I think just from a pure cash flow growth standpoint it provides a great growth opportunity for us. I think there is also an intangible on making our network more and more larger and larger and the coverage greater and the reach greater allowing us to compete more effectively against the cable networks and the other TV broadcast networks that we are competing against. Clearly reach and coverage has always been an issue with cinema and I think we are fixing that problem.

Obviously we continue to increase our strength relative to Screen Vision which is not a bad thing either.

Scott Barry – Credit Suisse

The Lowes payment looked a little light. Is there anything going on at that circuit in particular prior to the run out?

Kurt Hall

No, I think it is just a calculation. The way the calculation works is it focuses on things we are not allowed to get access to in Lowes which is primarily the on-screen advertising. So, I don’t think it was any lighter than it was last year and actually I think relative to the amount of on-screen revenue we produced this quarter versus last year’s first quarter it is pretty much right in line.

Scott Barry – Credit Suisse

If you could just comment and give us some color on the bump up on admin expenses and maybe sales and marketing as well? Maybe what component that is fixed to drive the growth going forward?

Gary Ferrera

Well admin expense is just obviously continuing in the public company. That is going to generate some of that because we have only been public for a year now so that has been building up. Sales expenses will go up if regional/local revenue goes up.

Kurt Hall

Sales expenses are pretty much variable. The majority of them. We obviously have some marketing expense whether it is taking out trade ads or any of that kind of stuff but generally most of our sales and marketing expenses are reasonably variable against the revenue.

Scott Barry – Credit Suisse

You feel like you have got the right people in place to drive the business going forward?

Kurt Hall

Yes, clearly as Gary said the place that we have been building resources has been in trying to keep up with all the FCC requirements and so on. From the time that we went public we have added 2-3 key people to that mix. I think we are at a point now where we are pretty stable. Clearly the amount of accounting people and things like that will continue to go up as the number of screens go up but they are reasonably low-cost individuals.


Your next question comes from Ari Davis - Pali Research.

Ari Davis - Pali Research

First on the TV scatter market in Q2. We are a little surprised about the trends that you are seeing given that most major media companies have been reporting pretty strong scatter trends in Q2. Can you talk a little bit more specifically about what it is you guys are seeing in the scatter market that is different from the major networks?

Kurt Hall

I don’t think we’re seeing anything significantly different. As I mentioned in my comments there were a number of contracts that came into the market in the second quarter, primarily in May as I mentioned, that we just chose to pass on. The numbers just started to get ridiculous after you took into account the CPM plus all the added value that was being offered by Screen Vision.

Look, I don’t know whether it was because Screen Vision was dumping inventory in anticipation of losing Lowes or whether they just had issues themselves with their own utilization but the one thing I know for sure is that if we were going to take these deals many of which were from big buying agencies we were going to get stuck with some pretty low CPM’s for the future. It just didn’t seem to make sense to us especially given what we’ve got in front of us with Lowes joining in the third and fourth quarter and next year.

So some of the revenue that you are seeing is we’ve made a conscious decision we are just not going to dive on CPM. We’re willing to be flexible but we’re just not…the quality of our network we believe is just so much stronger than Screen Vision if people want to go after the lowest pricing for the lowest quality network go for it. We’re just not going to go there.

Ari Davis - Pali Research

On the Regal Coke inventory it sounds like it is more of a back half of 2008 time frame or maybe even later in terms of being able to monetize that inventory. Can you talk a little bit about what is kind of at play there in terms of being able to monetize that? That question kind of stems from the fact that I’m wondering why it is not something that given the fact it is kind of beach front inventory why it is not something that could be monetized in the nearer term perhaps even during the summer when utilization should be higher?

Kent Hall

We can monetize it every month but it is just taking away another 30-second unit we would have sold. So really all it is an increase in the Regal circuit from eleven 30-second units to twelve. So you can say we sold it every month but all you are doing is taking money out of one pocket being another 30-second ad somewhere in segment one or two we have sold and moving it into that premier space.

I think really incremental revenue is only created when you have sold out of the existing eleven 30-second units and so we did that several times last year primarily in the third and fourth quarters. The months are pretty obvious. Very high utilization in July/August. Very high utilization in November/December. I think Gary’s comment sort of moved everybody in that direction.

Clearly as we start to sell out that beach front property as you called it is going to be much more valuable than the rate we were contracted to sell it to Regal and the same as the other founding members. So we see it as an opportunity. Clearly it is obviously creating a little bit of a revenue and EBITDA issue now because it is 100% EBITDA because there are no costs associated with it so every dollar of revenue loss is also a dollar of EBITDA loss. Obviously it is one of the factors that affected our first quarter. I suspect it will affect our second quarter as well and we’re hoping as we get into third and fourth quarter we start to sell it.


Your next question comes from Eric Handler - Lehman Brothers.

Eric Handler - Lehman Brothers

I am hoping you can talk a little bit more about your strong CPM growth you saw in the first quarter. It was a little surprising to me given that you had a good deal of excess inventory. Your content partners advertised less and you also had a bunch of new major national advertisers come into the fold. Was there anything unusual there that allowed you to show 7% CPM growth?

Kurt Hall

The only thing I mentioned is that we didn’t have as many 60-second sort of all network buys. So when we sell a 60-second unit it is usually at a lower CPM than a 30-second unit because we will generally discount the second 30 on some basis so the average of the two 30’s is somewhat less. So that could be a little bit of it. We did have some very significant 60-second buys last year. That was sort of what my comment was sort of to.

That could be part of it Eric. I will also just tell you that what we found was it was sort of binary that you’re going to get somebody that understood the value of our network and of cinema and they bought us at a really good CPM or they just wanted to get the lowest possible CPM they could get Screen Vision to agree to and they went with Screen Vision.

The difference is we are as much as $10-15 per thousand on some of the contracts that we saw and we passed on. There was quite a few clients that just went into the market and played the game between us and Screen Vision and there was a point in which we just said goodbye. We’re not quite sure where Screen Vision agreed to things but we’re pretty confident based on where we said goodbye at. Obviously we made a conscious decision that our threshold had been broken on the CPM and that we weren’t going to go there.

I don’t know what else to tell you other than our sales guys did a good job. But that obviously sounds reasonably self-serving.

Eric Handler - Lehman Brothers

When we think about your adjusted EBITDA margin for the year given the increase in proportion of affiliate revenue and some of the other stuff going on, can you give us some directional feedback relative, assume your adjusted EBITDA margin would be less than where you ended last year?

Kurt Hall

Yes. It is obviously with a higher network affiliates it is going to come down a little bit. The other factors that you have to take into consideration is there will be less Coca Cola revenue. As I indicated that is 100% margin revenue. So that is obviously going to have a downward pull. On the upward side obviously CPM and some other things help in that respect. Also having more content partner money in the back half of the year is going to help from a margin standpoint.

I think clearly the thing that I saw when we looked at first quarter and compared it to the consensus numbers out there it was clear to me the biggest sort of disconnect was margins and it really related to revenue mix. I think that it is very difficult in a low revenue quarter such as first quarter to pinpoint what the margin effect is going to be of losing one or two national contracts and in our case losing the Coca Cola revenue.

I think those margin impacts were much more significant than the street obviously estimated because the revenue numbers weren’t all that far off. Clearly there was more to meetings and events revenue which is a much lower margin than national revenue and that revenue mix shift right there alone will cause quite a few points of margin decline.

So I think that the challenge, and we highlighted this and we have been highlighting it in some of our presentations over the last few quarters, is the hardest thing to sort of zero in on are the quarter-to-quarter effects of revenue mix and shifting utilization on our margin. As you can see first quarter is even more pronounced just because it is a lower revenue period.

We have an awful lot of our operating leverage in one 30-second ad on a national sell because almost 100% of that falls to the bottom line. So, I think that is the thing that we have got to continue to fine tune with the street and I think on an annual basis it is not quite as big an issue because it seems to filter through the quarters and on an annual basis it seems to work out. Having said that as I indicated at the beginning of this comment we will have an increasing affiliate effect which will bring it down a little bit and we will have the Coke unit not being sold 100% of the time bringing it down a little bit.


Your next question comes from Barton Crockett - JP Morgan.

Barton Crockett – JP Morgan

I just wanted to go back to one thing you were saying at the last earnings call when you had expressed a degree of comfort at what had been the consensus at that time of EBITDA of $260 to $270 million for the year. You were saying that the first quarter would be closer to the 2006 percent of the total which is about 9%. If you take what you guys have actually reported around $21 million or so, do you still have comfort with what you were saying before or is that now not the case?

Kurt Hall

I think at the end of the day, Barton, what we said at the beginning of our talk before our last call was that we were comfortable with the numbers and it was very close to our budget and that was really what we were focused on. Clearly as Gary indicated we made our budgets in the first quarter effectively and it will all come down to sort of second quarter.

The issue as I indicated in my comments was whether or not we can make up the first half in the second half. We believe the second half is going to be pretty strong based on what we’ve seen and the question is can we make up by one or two new additional ads some of the downfall. The great thing about a miss in first quarter is one unit in July or one unit in December or any of these other very high attendance months makes up for a lot of loss in these slower months, first quarter, April and so on.

I think at the end of the day consistent with our comments is that clearly we think first half is softer than obviously we would have liked but we think second half is going to be strong. Whether we can make it up or not we said it would be a challenge.

Barton Crockett – JP Morgan

So it sounds like that is a bit of a modification of what we heard before which is fine. The other thing I was wondering about is as we look into the second quarter you said talking about utilization rates in May and April, overall on aggregate for the quarter do you have a view on utilization whether it should be up or down versus a year ago? At this point it looks like it is down a bit.

Kurt Hall

I hate to avoid the question but we have not given that kind of specific guidance. We have already told you the market looks a little soft and we have also passed on a number of contracts. I think in May in particular. So I think that is about as far as we are kind of willing to go.


Your next question comes from Lloyd Walmsley - Thomas Weisel Partners.

Lloyd Walmsley – Thomas Weisel Partners

I was wondering if you could help us quantify the impact of the extra fiscal week this year. You mentioned I think 725 million attendees annually pro forma for Lowes and the affiliates. Can you talk about if that is on a 52-week fiscal year period?

Kurt Hall

Yes it was generally on a 52-week period. We have increased our internal budgets both on the expense and the revenue side for that incremental week. I don’t know how else to answer that question. We have taken that into effect I guess is the answer.

Lloyd Walmsley – Thomas Weisel Partners

Would it be possible to provide an incremental attendance for Q4 based on that extra week? I know it’s not just an algebraic but it is a very high volume week.

Kurt Hall

It is a high volume week. I think you can use whatever statistics the circuits have given you on that to get an impression of what the attendance is for that extra week and you are right it is a fairly big number.

Lloyd Walmsley – Thomas Weisel Partners

But as far as selling it, it doesn’t change at all the way your business operates?

Kurt Hall

It does. We sell higher attendance base for that flight. So that flight I guess will be an additional week included somewhere throughout the year for that 53rd week. So when we are out selling they are selling an attendance load that we believe will happen in a specific flight. So it will obviously have an impact on what the contract value, if you will, is of that flight.


Your next question is a follow-up from Ari Davis - Pali Research.

Ari Davis - Pali Research

There seems to be a lot of confusion out there in the marketplace with investors trying to understand the level of visibility that you all have. You made a comment that one contract can swing a quarter. The other thing though it seems like there are more and more advertisers interested in advertising on the cinema platform.

You have a lot of new categories and I’m just trying to connect the disconnect here. It seems like more people want to use this platform yet it seems like visibility is increasingly challenging at a time when it sounds like a lot of the media industry is talking of how great the national television scatter market is looking into the next several months and you’re saying it is soft and passing on contracts. I’m just trying to tie all the data points together. Any help would be great.

Kurt Hall

I think clearly first quarter let’s start there. There was $3 million of content or partner money that we got last year’s first quarter that we didn’t get this year which will be spent throughout the year. So that is just a pure shift of $3 million as we said in our comments from first quarter to some of the other quarters throughout the year. So that alone can kind of get you to your first quarter numbers.

We also had a contract or two in the first quarter we passed on and other contracts. We also did in May. The thing you have to understand about television I have never heard of a television guy passing on a contract because they have so much inventory and so many day parts that they can fit certain levels of CPM’s into in their overall budgeting process.

We have obviously a more limited amount of inventory and so we have got to be a lot more selective in what CPM’s that we accept. We felt pretty good about the decisions we were making because as far as I was concerned we are running this company for the long term and not just to try to make quarter-to-quarter numbers. We could have come a lot further in the first quarter and a lot further in the second quarter by accepting all these contracts on a pure revenue base but we sure would have set ourselves up for a lot of problems going forward from a CPM growth standpoint.

If you look at what this company is really all about over the next 2, 3 or 4 years it is about filling out the utilization over the next 2-3 years but doing it in a way that doesn’t kill our growth potential in that year 3, 4, 5 when the CPM becomes one of the more primary growth drivers. So that is really what I think the story right now for us in the first half is there was money out there. We just chose not to take it quite honestly.

Ari Davis - Pali Research

When does the money lose leverage? At what point do you gain the leverage and the money comes to you asking to be in there versus you having to pass on business because of price?

Kurt Hall

If you listen to my comments what I was trying to get across and maybe I was a little too subtle and I’ll be less subtle now, is that what we are seeing is a lot of clients are now starting to get the message that Lowes is no longer in Screen Vision on June 1. Screen Vision will have this run out period which caused some of the issues that you are talking about and a lot of you alluded to that being an issue potentially. I was hoping that Screen Vision would take a longer term view of the world. They apparently haven’t. We are very comfortable given what we are seeing because we are starting to see very large buying clients buying us throughout this year, the end of this year, and even committing to 2009. That is something at this time last year we really didn’t see. People were making much more short term commitments, one flight at a time. If you got two flights you were real lucky.

We’ve had some real wins recently in the last two or three weeks on clients that have bought multiple flights in 2008 and in 2009. We even had one client that exclusively bought from Screen Vision that took their buy later this year and split it between us and Screen Vision.

To me those are all signs that we are starting to see what we want to see once the Lowes and these other guys start joining.

Ari Davis - Pali Research

When Screen Vision no longer has Lowes will Screen Vision still be a problem? How much risk is it that they continue to just drop price and hurt business for you?

Kurt Hall

They will continue to do that probably forever. The better question is will it matter? Our strong belief is that their network while still give or take 10-11,000 screens is going to be challenged from a quality standpoint and from a market coverage standpoint. There are a lot of markets in the top 10 and the top 25 where they may have one theater in the market and it is on their list as having market coverage. Denver happens to be one of those markets.

I think what you have to believe and what we believe very strongly is that there is going to be clearly a bifurcation of the money and there are going to be continuing clients that all they care about is price. Those probably won’t be our clients until Screen Vision completely goes away. It may not ever happen. But at the end of the day we are very confident that the money will start to move our way when the quality of the network is so different. Because the network that Screen Vision is selling up until May 31 if you look at the numbers and you are not a media buyer that gets below the details, which a lot of them don’t as you well know, it doesn’t look that much different.

But you start shifting Kerasotes, you start shifting Lowes, you start shifting Hollywood over and it looks significantly different and that is what we’ve been trying to obviously make the market understand. We have got a big adage thing coming out shortly on us. We will see but that is our view. You guys will believe whatever you want to believe but we have seen a lot of very positive signs on this forward buying thing. I don’t know any other way to sort of position it.


This concludes today’s question-and-answer session.

Kurt Hall

I think we have pretty much covered all the issues. So again thank you very much. Obviously Gary and I will be available after the call if anyone has any follow-up calls. Thanks for your support and we’ll talk soon.

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