National CineMedia, Inc. F2Q08 (Qtr End 06/26/08) Earnings Call Transcript

| About: National CineMedia, (NCMI)

National CineMedia, Inc. (NASDAQ:NCMI)

F2Q08 Earnings Call

August 6, 2008 5:00 pm ET


Nikki Sacks - Integrated Corporate Relations

Kurt C. Hall - Chairman, President, and Chief Executive Officer

Gary W. Ferrera Executive Vice President and Chief Financial Officer


Eric Handler Lehman Brothers

Barton Crockett JP Morgan

Scott Barry - Credit Suisse

Hunter DuBose - Morgan Stanley

Rich Greenfield - Pali Capital


Welcome to the National CineMedia Inc. second quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Nikki Sacks with Integrated Corporate Relations.

Nikki Sacks

I'd like to remind our listeners that this conference call contains forwardlooking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts communicated during this conference call, may constitute forwardlooking statements. These forwardlooking statements involve risks and uncertainties. Important factors that can cause actual results to differ materially from the company's expectations will be disclosed in the "Risk Factors" contained in the company's filings with the SEC. All forwardlooking statements are expressly qualified in their entirety by such factors. Now I will turn the call over to Kurt Hall, CEO of National CineMedia.

Kurt Hall

Today I'll be providing you with a brief overview of our second quarter operating results and highlights of what we expect for the second half of the year. Gary Ferrera, our CFO, will then get into a more detailed discussion of our financial performance for the quarter and our specific financial guidance for Q3 and the full year. And then, as always, we'll open the lines for questions.

As we had indicated in our update call at the beginning of June, our Q2 was not a great quarter versus 2007. Our Q2 total revenues increased 3.6% yearoveryear, as growth in our meetings and events and local advertising revenue more than offset a decline in national advertising revenue.

However, our total Q2 2008 adjusted OIBDA declined versus Q2 2007 due to a change in revenue mix away from the higher margin national advertising and beverage revenue. While our Q2 national advertising inventory utilization of 66% was down versus 80.8% in Q2 2007, our national cost per thousand (or CPMs) were up 12.5% in Q2 versus the prior year, reflecting a favorable mix of national contracts towards clients with less pricing sensitivity and our focus on maintaining the integrity of our rate card.

Given our relatively weak Q2 national advertising performance, we have taken a hard look at the underlying Q2 national scatter marketplace. The main issue appears to be that the softer scatter market resulted in a decrease in the volume and size of deals in the marketplace. Also, some of the money that was in the scatter marketplace was beveragerelated, carried lower CPMs, or was inappropriate for cinema, including certain pharmaceutical brands, highend business products, and some political ads. In addition, direct response ads were used by TV as an inventory filler. Direct response ads were generally not going to be appropriate for cinema.

While our decision not to pursue certain deals obviously contributed to our lower national inventory utilization, we continue to believe that over the long term it is critical that we produce a highquality preshow and maintain the integrity of our rate card, especially during higher theater attendance periods like May and June.

Having said that, we are doing a number of things in order to reduce our exposure to these softer time periods throughout the year. We have extended and expanded our content partner relationships and our cell phone courtesy PSA and are looking on establishing more longterm relationships with new clients that buy media throughout the year. While we will be introducing these new clients to cinema at a lower CPM, it will reduce our reliance on ad buys associated with product launches and with other events or seasonal marketing priorities.

Over the last few months, we have signed several multiyear deals, including the cell phone courtesy PSA which Sprint announced yesterday, and renewals with longtime content partners Sony Pictures and Turner Entertainment. I'm also pleased to announce today a new expanded relationship with Disney, including its ABC television network and ABC Family Channel. The Sprint deal was a 3year deal beginning this October, and each of the content partner arrangements will provide increased spending commitments for 2009 and 2010.

As demonstrated by the growth implicit in our second half guidance, the structure of these longerterm commitments represent a very important part of our strategy to expand our national advertising revenue base and create less volatile national advertising revenue on a quartertoquarter basis. By selling more inventory in advance or up front, we reduce our reliance on the ebbs and flows of the scatter market. In addition, our content partners are entertainment related-companies, which could also help buffer some of the impact of a weaker general economy.

We've also made progress expanding our client relationships in the scatter market with recent new client additions in the travel, pharmaceutical, personal care, and entertainment sectors. Through Q3, we have had eight client categories that have grown by more than $2 million versus the same 9month period last year. However, we have had five categories that have declined by more than $2 million. Categories which have seen the largest growth include domestic auto, cable TV, retailers, electronics, and credit cards. Cable TV, telecommunications, import auto, broadcast TV, and movie studios are currently our top five categories.

The single largest declining category was packaged foods, as we continue to struggle to establish recurring relationships in this very important spending category. We also saw decreases in home video, as commitments with certain of our content partner agreements were reallocated to other products and video games, as 2007 deals primarily related to product launches.

As you would expect, in most cases these declining categories were comprised of a limited number of clients, which highlights the importance of expanding our client relationships across all categories. Clearly, we cannot rely on direct response or other fillin advertisers the way that television can. We continue to work on the packaged food category.

NCM, along with Screen Vision, has recently agreed to make a minor investment in the upgrade of the media mix planning software of a large agency, to assist with a specific cinema media planning project of one of their multibrand clients. We are also discussing a socalled airplane deal with a couple of different clients who traditionally are more price sensitive but will allow for inflation flexibility throughout the year.

Our local advertising business posted solid Q2 quarterly growth, with yearoveryear revenue up over 7%. This growth was primarily related to the expansion of our theater network and a slight increase in local revenue per attendee over Q2 2007. You should note, however, that Q2 2007 had increased nearly 50 percent from Q2 2006 as the business benefited from the market excitement surrounding a number of Q2 2007 [inaudible] film sequels.

While our local business appears to be more resilient to slowing economic conditions than several other traditional local mediums, the moderation in our growth rate appears to be somewhat related to the weakening economy, as our average local contract values have decreased in Q2 2008 versus 2007. Our local sales personnel are reporting an increase in clients who are entering into monthly contracts rather than annual or multimonth contracts.

Fortunately, our local client base is very large and geographically diverse, with over 4,300 clients currently. Our local client base is also very well diversified across a variety of industry sectors. This diversification has clearly helped us minimize some of the impact of the weaker economy, as we were not overly exposed to the real estate and financial sectors.

Our meetings and events business had another great quarter, with yearoveryear revenue growth of 70%, reflecting growth both in our CineMeetings and Fathom divisions. In fact, our Fathom revenue doubled, as the expansion of our live broadcast capabilities to over 400 locations has allowed us to expand the per event revenue potential and attract more and higher quality content.

While the operating margins of these businesses are much lower than our advertising business, the increase in revenue, the operating leverage associated with our national network, and more efficient corporate and event management has allowed us to increase our meetings and events operating margins after the allocation of all fixed and variable costs.

While I am obviously disappointed in our overall Q2 revenue growth, we made significant progress expanding and strengthening our digital theater network and are planning to launch the beta version of our new, more robust website in a few weeks that will extend the reach of our FirstLook preshow and act as a gateway to an ad network sold primarily by our existing sales force. Both of these factors should improve our ability to attract more national clients and create a less volatile and better longterm growth profile.

For the Kerasotes, Hollywood Theaters, and the AMC Loews circuits coming online throughout the year, our market share of theater attendance in theaters that show advertising in the top ten DMAs has now increased to approximately 75%, with a 65% share in the top 50 markets.

Our plan is to continue to focus on the expansion and strengthening of the geographic coverage of our network through theater additions by our founding members and the addition of the network affiliates as it will allow us to provide a broader marketing platform, important to several client categories, most notably QSRs and retailers and their product suppliers who are looking for better coverage of their individual retail locations.

You should note, however, that there is generally a ramping up period in revenue growth associated with the new circuit additions, as those new screens are integrated into client proposals. While it is still early to tell, we continue to believe that the growth of our network, particularly the recent addition of AMC Loews, will have a positive effect on our future growth.

Looking ahead, we expect solid national advertising growth in the second half of 2008. While the scatter markets continue to develop later than they have historically, giving us somewhat less visibility into our future national sales pipeline, our Q3 revenue guidance includes only booked deals as the sales activity for Q3 is winding down.

While there are a number of positive factors and market indicators which leave us confident that we can achieve our projected growth in Q4, the projected revenue amount is not entirely booked yet. The good news is that, with the addition of AMC Loews and the 53rd week, we have more than enough inventory to achieve our projections.

We also remain reasonably bullish on the second half theater attendance as the third quarter is off to a strongerthanexpected start with the success of Dark Knight and a robust slate for Q4 including sequels Madagascar, the next James Bond film, and the sixth Harry Potter film. In addition to providing more impressions for our national team to sell, the strong sequel base movie slate has historically benefited our local advertising business. We are hopeful that this strong film slate could provide a bit of a hedge for our local ad business, should the economy continue to soften.

As we announced earlier today, we have increased our quarterly dividend by approximately 7% to $0.16 per common share. This increase is reflective of our strong cumulative free cash flow since our IPO and our outlook for the second half of this year and beyond.

Also, a year ago, we made a commitment to review our dividend policy annually, with the intent to distribute a significant portion of the free cash flow received from our operating partnership with the founding member theater circuits. While a worsening of the economy could adversely affect the advertising business over the near term, existing cash balances at the NCM Inc. level, the higher overall operating margins of our advertising business, and the continued growth of our meetings and events business provide a substantial dividend cushion.

Given our corporate structure, we felt that increasing our regular dividend was the best way to return value to our shareholders and maintain financial flexibility as opportunities present themselves or business conditions change.

While I am disappointed with the lack of growth in the first half of this year, these recent results have not changed our original thesis about the shifts going on in the media business. As such, our business plan remains unchanged. We will continue to focus on expanding the geographic reach and coverage of our digital network, expanding the depth and breadth of our advertising and CineMeetings client base, continue to expand the Fathom programming, and continue to improve the experience for theater patrons.

I am confident that, if we continue to remain focused on these basic strategic goals, we will deliver attractive revenue and free cash flow growth and superior returns to our shareholders. Now I'd like to turn the presentation over the Gary to give you more details concerning our financial guidance.

Gary Ferrera

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 2008. My discussion on yeartodate information will focus on our pro forma results that assume that the IPO and related transactions and $805 million senior secured credit facility were effective as of December 30, 2006.

In addition, you should also note that the effects of the Loews integration agreement is not included in our operating results as those net payments are recorded directly to our equity account. The AMC Loews integration amount was $3.2 million for the second quarter of 2008 and $4 million for the first half of 2008. Similarly, Consolidated Theaters, which Regal acquired on April 30, is not included in our operating results, as there is an existing contract for onscreen advertising through January 2011.

These net payments for May and June were recorded directly against the intangible asset established in conjunction with the issuance of LLC units to Regal related to the Consolidated circuit acquisition. For the second quarter of 2008, these payments were approximately $500,000.

For the second quarter, total revenue grew 3.6% to $86.7 million. Advertising revenue declined 2.5 percent to $74.8 million. While meetings and events revenue increased 70% to $11.9 million. This resulted in total Q2 adjusted operating income, before depreciation and amortization, or adjusted OIBDA, of $42.8 million, a decline of 8.4% from the prior year.

Adjusted OIBDA margin was 49.4% versus 55.8% in the second quarter of 2007 due to a shift in revenue mix towards our lower margin meetings and events business, as well as our lower margin local advertising business. Adjusted OIBDA, including the AMC Loews and Consolidated Theaters payments of $3.7 million for the quarter, was $46.5 million versus $49.5 million in 2007, a decline of 6.1% from the prior year.

Net income was $0.10 per diluted share for the current quarter, compared to $0.15 per diluted share in Q2 2007. Our revenue and adjusted OIBDA were better than we had previously anticipated due to several factors, including a positive adjustment in make goods for the quarter as attendance in the month of June was stronger than we anticipated, higherthanexpected performance in our meetings and events business, as well as greaterthanexpected expense savings across most departments.

The income tax provision for Q2 reflects an adjustment of $800,000, which increased the current quarter tax provision and decreased net income. This had an impact of $0.02 on earnings per share. This adjustment is the cumulative result of applying a lower overall tax rate to deferred tax assets and liabilities expected to the realized or settled on or after January 1, 2009. This lower tax rate is due to changes in our Colorado state apportionment calculation as a result of the tax law change enacted in Q2 2008. This should result in our paying a lower tax rate in the state of Colorado in 2009 and beyond.

The decline in total advertising revenue was primarily due to a nearly 15percentagepoint decline in national advertising utilization and a $1.3 million decrease in beverage revenue, compared to the prior year, primarily due to a reduction in contracted beverage advertising time by one of our founding members.

These declines were partially offset by a 12.5% increase in CPMs and higher local advertising revenue. Advertising revenue per attendee fell by 9.4% to $0.48 due primarily to the lower national revenue, combined with a 6.8% increase in attendance. Even with the increase in attendance, local advertising revenue per attendee increased slightly to $0.11.

Note that we are now providing ad revenue per attendee based on total attendance, including founding member and affiliate screens, as we feel it is more appropriate due to the increasing number of affiliate screens in our network. The advertising mix for the second quarter of 2008 was approximately 64% national advertising revenue, 22% local advertising revenue, and 14% beverage agreement revenue versus 65%, 20%, and 15%, respectively, in Q2 2007.

We entered the quarter with approximately $1.9 million of make goods and, as of the end of the second quarter, we had approximately $1.1 million of make goods, compared to $1.7 million at the end of the second quarter 2007.

Approximately $500,000 of the current balance has been carried from the end of 2007 at the request of three clients, due to the timing of ad campaigns. We incurred additional make good liabilities in the lighter attendance months at the beginning of the quarter, but were able to make up all of that balance in June.

We continue to see growth in our local advertising in the first quarter, which was up 7.2% over Q2 2007, due primarily to an increase in the total screens in our network. You should note that there is typically a delay between the time that we add a theater chain when these new screens are installed with digital equipment and when we market these new impressions. Kerasotes was added in December and was fully installed and available for marketing by the end of the first quarter. While Hollywood and AMC Loews screens are now part of our advertising inventory, the screens will not be fully integrated into our sales process until Q3 for Hollywood and Q4 for AMC Loews.

Our meetings and events business also had a solid quarter, as revenue increased to $11.9 million from $7 million in Q2 2007. As we increased our CineMeetings client base and attracted a number of successful programming events to our Fathom network, our Fathom event count during the quarter this year was double what it was during the second quarter of 2007.

Turning briefly to our expense line items, advertising operating costs increased approximately 220 basis points to 5.1% of advertising revenues, due primarily to the increase in our affiliate network and the decline in our higher margin national advertising and beverage revenue.

Meetings and events operating costs increased to 61.3% of meetings and events revenues from 55.7% in Q2 2007, primarily due to an increase in revenues attributed to higher quality events with higher content splits. In Q2 2007, one of our more successful events was a marketing event with upfront marketing payments and limited content splits.

Network costs increased slightly by approximately 10 basis points to 4.5% of total revenue, due to the increased size of our network.

Theater access fees were up 60 basis points to 16.2% of advertising revenue, due to the semifixed nature of these costs along with a modest decline in advertising revenue.

Selling and marketing expense increased approximately 140 basis points to 13.7% of total revenues in Q2 2008. This was due to a variety of factors such as the semifixed nature of the national sales force, along with a slight decrease in national advertising sales, as well as an increase in marketing personnel costs, the expansion of our local sales force in line with the growth of our network, and higher commissions related to higher local advertising and meetings and events revenue.

In addition, we increased our bad debt provision reflecting the increased local client base and revenue levels.

Administrative expenses declined to 6.6% of total revenue from 6.9% in Q2 2007, due to lower personnel costs, including a reduction in accrued bonuses which are based primarily on achievement of OIBDA budgets.

Year-to-date ended June 26, 2008, total revenue increased 2.4% to $149.4 million, including advertising revenue of $128.5 million, compared to pro forma advertising revenue of $132.6 million in the first sixmonth period of 2007.

Adjusted OIBDA was $63.5 million during the yeartodate period in 2008, compared to $72.4 million in the comparable period of 2007. Adjusted OIBDA, including AMC Loews and Consolidated Theaters payments, was $68 million for the first half of 2008 versus $76.5 million in 2007, a decline of 11.1% from the prior year.

Our theater network continues to grow. As of June 26, 2008, we had over 17,000 total screens in our network, including 2,771 network affiliate screens. Approximately 14.7% of these screens are digital. On a weighted-average basis, our network grew by approximately 12% for the current quarter over last year's similar quarter.

Approximately 16% of our network is now composed of affiliate screens, compared to 7% a year ago. Approximately 86% of the screens were connected to our digital network, versus 87% at the end of the second quarter of last year. However this number will increase as we complete the installation of Hollywood. These digital screens continue to generate over 90 percent of our attendance. Our screen count now includes the approximately 1,000 AMC Loews screens and the 480 Hollywood screens, but not the 400 Consolidated Theater screens that will be included in 2011.

Our capital expenditures for the quarter were $3.7 million with a total of $9 million in the first half of 2008. We continue to estimate 2008 CapEx will be in the range of $17 million to $18 million for the full year, with the capital expenditures in the second half of 2008 primarily related to adding Hollywood to our digital network, our internet initiative, and recurring software development and IT costs.

As you would expect, we are constantly in dialogue with potential new network affiliates; however, this guidance does not take into account any potential further network affiliate agreements that may be signed during the year.

Regarding our balance sheet, our total debt outstanding as of June 26, 2008, was $772 million, comprised of the $725 million term loan and a $47 million revolver balance versus $43 million at the end of Q2 2007 and $59 million at the end of fiscal 2007. The interest rate on our $725 million term loan was 6.3% for the Q2 period while the interest rate on the revolver borrowings was 5% for the Q2 period. Our average total cash interest rate, taking into effect our swap agreements on $550 million of the $725 million term loan, was approximately 6.2% for the quarter versus 6.9% in Q2 2007.

Our pro forma leverage in NCM LLC as of June 26, 2008, is approximately 4.2 times trailing fourth quarter pro forma adjusted OIBDA, including the AMC Loews and Consolidated payments. While we do not anticipate paying down our term debt, we expect to continue to delever over time to OIBDA growth and do not envision dropping to a leverage ratio of much less than 3 times before reevaluating our capital structure.

As Kurt mentioned previously, we will be raising our dividends by approximately 7% to $0.16 per share. Including this dividend, we will have distributed to shareholders approximately 80% of the postIPO cash distributions received by NCM Inc. after reserving for income taxes and tax sharing payments to the founding member circuits. You should also note that the increased dividend level represents an annual yield of approximately 5% based on recent trading levels of $12 to $13 per share.

As we indicated on our second quarter update call, I will now provide quarter and annual guidance. For the third quarter of 2008, we expect total revenue of between $103 million and $106 million. We expect adjusted OIBDA between $58 million and $60 million. For the full year 2008, we expect total revenue between $360 million and $365 million. We expect adjusted OIBDA between $180 million and $185 million. In addition, we expect the combined amount of the AMC Loews and Consolidated payments to approximately $6 million to $7 million for the full year.

Our Q3 financial guidance is based on booked national ad revenue to date, and our Q4 guidance reflects an assumption that we book a similar amount of national revenue from this point forward as we did last year. You should note that this guidance assumes zero new make goods being generated in Q3 or Q4. With that, I'd like to pass the call back to Kurt for some closing remarks before we open up the lines for your questions.

Kurt Hall

While the current economic slowdown seems to be moderating the growth of the overall advertising market and we will continue to see some quartertoquarter volatility as we expand our national advertising client base, we believe that over the long term the expansion of our network and the continued migration of media spending to higher quality digital advertising mediums will allow us to continue to grow our market share of overall advertising expenditures.

This, combined with the longterm commitments of our content partners and other longterm relationships like we just completed with Sprint, should soften any shortterm impact on our business of a softer economy. This concludes our prepared remarks, and we'll now open up the lines for any questions.

QuestionandAnswer Session


(Operator Instructions) Your first question comes from Eric Handler - Lehman Brothers.

Eric Handler - Lehman Brothers

Can you tell me if you start providing more inventory for your content partners, what sort of target level you'd be looking for from these relationships in terms of the amount of inventory that would be allocated to them and where does that stand right now? And, secondly, can you give us a perspective on did the Olympics have any impact at all on what you're seeing in the third quarter?

Kurt Hall

The first question is we're not actually giving the content partners any more inventory. They're actually committing to higher levels of dollars as they renew their contracts and to higher CPMs. So the amount of inventory they get is just the calculation of committed dollars sort of divided by CPM, if you will. So we allocate that, some of the money they're required to allocate to the line in the lobby. So the amount of inventory is really not the issue, it's the amount of content they get is still the two and a half minutes and so on. Nothing all that much structurally has changed other than the overall commitments have gone up.

The answer to your second question is, interestingly enough, it actually probably affected us a little bit positively because, as you know, NBC is one of our content partners. They have been using their commitments, their content partner commitments, very heavily primarily in the third quarter surrounding the Olympics.


Your next question comes from Barton Crockett with JP Morgan.

Barton Crockett - JP Morgan

I wanted to ask you a question about the fourth quarter outlook. At this point last year, what percent of the fourth quarter had you sold and what percent came in, so we can get an idea, if you are willing to go there, about how much you see at this point a little bit more precisely.

Kurt Hall

Well the percentages last year are obviously much higher because our budgets were much lower last year.

Barton Crockett JP Morgan

I mean the percentage of the fourth quarter that you had sold at this point last year.

Gary Ferrera

I think Kurt's point is that it's apples and oranges because the amount of inventory we have available, etc., is different in the Q4 this year than last year.

Kurt Hall

Our budgets last year were lower than this year. So, because of the lower inventory obviously, as Gary indicated and as far as we can go on this call, the way we prepared our projections was to basically take all of our booked revenue for the fourth quarter and add to it the same amount of revenue we basically booked from this period forward. Obviously, that results in the projection that we've created. As we indicated for the third quarter, our revenue projection assumes what we've got booked as of today.

Barton Crockett  JP Morgan

So it's the same absolute dollar value, even though you have more inventory to sell?

Kurt Hall


Barton Crockett  JP Morgan

And then, switching gears a little bit, in terms of the situation with Screen Vision, can you give us any update there? I know that they've been competing with you and that's caused some issues in the market. I know there's discussion about what possibilities are there for maybe you to do more with their partners and various ways to get there in terms of their theater network partners. Can you give us an update on what you're seeing there?

Kurt Hall

We're continuing to see certain contracts where we compete against Screen Vision. For some reason, as we've indicated before, there may seem to be a little bit of a increased level of what I will call price competition. As we indicated, that resulted in a few contracts that we didn't go for. It's really died down a little bit. I don't know whether that's just the summer; I don't really know what the reason is.

We're obviously, as we've indicated, pretty well booked for the third quarter. We haven't really bumped into them all that much in the third quarter and a few deals that are being tossed around in the fourth quarter. I wasn't sure where you were going with your second question. Were you talking about an acquisition or what were you talking about?

Barton Crockett  JP Morgan

I guess I was trying to be too cute with it. What can you tell us about the fact that it seems like their partners are evaluating alternatives and their coowners and Screen Vision might not be a holding for them.

Kurt Hall

It clearly seems like they've been doing that for a long time. I know ITD announced their intentions on that quite some team ago, so I don't know whether they're reevaluation is being done at a higher level now or is more urgent or whatever. As I've said in the past, I would be interested in looking at a potential acquisition. At this point, I don't have anything to report.

Clearly we're just watching to see how the market is developing, seeing what effect the Loews transition over to us has had, taking it one day at a time. Really not a lot of urgency on our part at this point, the way I look at it; but we’re always interested to talk about a deal that makes sense and is accretive.

Barton Crockett  JP Morgan

And the final question, can you tell us a little bit about what's happening with your efforts to convince advertisers who are resisting on CPM, someone like a Proctor & Gamble who's used to paying a lower CPM on daytime television. Are you getting any traction there in terms of convincing people to pay a little more for the premium impact that you get on a theater ad?

Kurt Hall

Obviously the client you suggested, and there are others that are used to buying television at somewhat lower CPMs, somewhat less prime-time oriented inventory and so on. So what we've been working on is to really try to help them understand, their agencies in some cases and the clients in other cases, the value proposition of cinema. Clearly a lot of these guys are getting hung up in the math of, well, if I put your higher CPMs in, my gross rating points go down. While mathematically that is correct, it's our job to try to convince them that a rating point, if you will, or impression in a cinema is a heck of a lot more valuable than it might otherwise be on television or some of the other mediums. That's the job that we're doing.

As I indicated in my comments, we're working on a number of projects with specific agencies and/or clients, so I don't have anything to report. I can tell you it's moving forward. Clearly bringing Sprint on board, Sprint is an advertiser that advertises pretty much all year-round, and bringing them on board in this cell phone courtesy PSA is a really big first step for us.


Scott Barry with Credit Suisse has our next question.

Scott Barry  Credit Suisse

I have a couple of questions mostly regarding the Loews transition. First, once Loews was turned over and you got a look at it, could you just comment on how that sold Loews’ inventory impacted your prior expectations for the third quarter? Then, secondly, can you give us any color at all on conversations you have had with exclusive Loews’ clients once the asset was turned over, any successes there and have there been any change in the tone of conversations with clients in general now that you control that asset?

Kurt Hall

I think the first thing is we finally, after June, got the inventory that had been sold by Screen Vision in the Loews circuit and it seemed to be pretty well sold as we would have expected in June, July, and August and then it starts to fall off. And there's a quite of bit of inventory available for us to sell in the October/November timeframe. It didn't really impact all that much. It was pretty much what we thought.

We got a reasonably good payment from AMC of the payment they were going to get from Screen Vision in June and July and August we’re expecting. I think that's good news for us because it gave us some good lead time to go out and sell the inventory that we have available, which is primarily in the October/November timeframe which is the end of the runout period. So no real surprises there, quite honestly.

As far as clients go, the ABC/ABC Family deal that we announced, ABC Family actually advertised with Screen Vision this year. So that was obviously a movement of money that we were happy with. There's been a couple of other contracts where clients either are considering us or have in the past maybe gone 100 percent with Screen Vision are now splitting the deal between us and Screen Vision.

As I said in my comments, there are some signs that we like, but it's still a little bit early to tell. I think we'll know more about it when we start really getting into the sale of the October and November inventory.

Scott Barry  Credit Suisse

Did you mention what your market share is now in the top ten?

Kurt Hall

We said approximately 75% of the top ten and 65% of the top 50.


From Morgan Stanley, we'll go to Hunter DuBose.

Hunter DuBose – Morgan Stanley

Can you tell us what assumptions are baked into your fourth quarter guidance regarding total domestic box office performance, and to the extent that we see were key to the 100% maxed out utilization for this year as we did see in the fourth quarter of 2006 and 2007? Does that tend to imply potential upside to your numbers to the extent the box office outperforms whatever you're assuming?

Gary Ferrera

The numbers that we're using, I can't really give you specifics, but we basically take the three founding members' estimates and we do a little of an analysis; but you can basically assume that we're looking at it the same way the three largest theater chains in the country are. That's what we're using.

If there's upside from that, obviously as we mentioned before, we price in at a certain level and we try to price in just above where we think the market may come out and that's why sometimes we're running make goods. If it performs over that amount, obviously we don't get any additional amount of money.

Hunter DuBose  Morgan Stanley

Given the tendency in the last two fourth quarter periods you have had for 2006 and 2007, given the tendency to max out at 100% utilization rate and go beyond that when you added extra units, do you have a sense of what sensitivity there is to your fourth quarter guidance numbers to the extent that there is a very strong box office in excess of what you're expecting?

Kurt Hall

I think the best way to look at this is, first of all, we have a 53rd week in the fourth quarter, or 14th week if you are looking at the quarterly weeks. That’s going to provide an awful lot of what I call make good cushion, if you will, in that last week. Ordinarily that attendance would have flowed obviously into the first quarter of the next year, and that revenue will be captured this year. And it will be a big week, too. That obviously provides some good cushion for us on attendance. What was the other question?

Hunter DuBose  Morgan Stanley

I just want to get a sense of what the sensitivity is, especially since the contracts have ended in all the Loews screens as well. Does that mean that it's less likely for you to be able to max out at 100% this time or do you feel pretty good about that?

Kurt Hall

We're going to have a lot more inventory. As I said in my remarks, and I think Gary mentioned it, too, our projections leave a lot of inventory to be sold. Clearly, there's a very vibrant scatter market that materializes in the fourth quarter sometimes. We're going to have the inventory to handle it. We've not only got the Loews inventory the 53rd week, we also have that extra Regal 30. So it's not across our whole network, it's only in the Regal circuit; but it's obviously a lot of inventory.

Hunter DuBose  Morgan Stanley

Just to clarify that point. You were saying earlier that the guidance you are giving out today is based purely on the bookings you've already done, so to the extent there's any incremental bookings that would be upside to your guidance?

Gary Ferrera

No. We said that for Q3, but Q4 is based on the bookings we have plus a similar amount to what we booked last year from this point in time on. So it's a number that we could range in on. To Kurt's point, it still leaves significant inventory for make goods or, if the scatter market improves and we've got more things to sell, we've got the inventory to do it.

Just for some reference points, last year we had $4 million in make goods at the end of the year. I think it was approximately $3.2 million of which were generated in Q4 and, as you know, it was pretty weak last year. The year before that I believe we ended the year with $2.6 million in make goods. So those are some bookends for you to get a comfort of what might be of magnitude.

Kurt Hall

The other thing that's important on the make goods, and Gary mentioned it in his comments, is that the first two months of any quarter aren't the most important months to really worry about from an attendance shortfall. It's that last month, because that's the month where if you don't reach your attendance goals that are implicit in your advertising contracts, that revenue will then get deferred into the next quarter. So, given that December is going effectively have that 53rd week in it, I think the make good risk in the fourth quarter is somewhat less than it would otherwise be just because of that 53rd week.


We next go to Rich Greenfield with Pali Capital.

Rich Greenfield - Pali Capital

Two questions. The first thinking about the growth in CPMs, you were able to reach a pretty significant increase yearoveryear with utilization down a lot. I was wondering if I could give us a feel for why the customers who were still willing to do business with you this quarter, in terms of that 66% utilization, why they were willing to pay so much more yearoveryear. Was it a mix of customers and what in that mix that drove that CPM up so much? How do you think about the tradeoff of the CPM being up 4% or 5% but having higher utilization as you think about that balance? Is that what you're discussing that we should expect lower CPM increases as we move throughout the rest of the year but higher utilization?

And to follow up on the last question from Hunter, this extra 53rd week, I want to understand from the standpoint of your guidance implies a 10% to 20% revenue increase in Q4. Does that include selling the 53rd week or is that simply using 53rd week right now as buffer for make goods?

Kurt Hall

The last question, you're implicitly selling it because in our projections and in the contracts that we sell for the clients, the attendance from that 53rd week is in that. Before we turn the sales force loose, if you will, on each flight, the attendance is estimated for them and that's the attendance they sell to the client. The answer is it's implicit in the contracts that we're selling and, by the way, it will create incremental attendees that we can use for make goods. So the answer is yes to both questions.

The tradeoff to the CPM utilization is really an interesting one. Obviously, one could say were there some contracts in Q2 that in hindsight maybe you should have taken just because your CPMs were so high with all the other contracts. I guess I'd be hardpressed to say no to that. I would say that in at least one or two cases it might have been the right thing to do in hindsight. It's always hard to tell.

But I can tell you in one case, we actually said no to somebody that has now come back to us and in 2009 we've signed them on at a much higher CPM than we believed the deal would have gotten done in 2008. So, it can work both ways. And it's always a little bit of a crap shoot on whether you're doing the right thing to accept that lower CPM. Having said that, I hope you could guess from our comments that we're clearly mindful of this issue of there's just so much money out there that's willing to pay the higher CPMs; and at some point you're going to have the create a relationship or structure with clients that are used to paying lower CPMs and are only comfortable paying those lower CPMs.

I think the thing like the airplane deal we talked about where we have more flexibility to land the inventory wherever we want throughout the year. I think clearly doing a deal with somebody who is willing to buy multiple months and a good percentage of those months maybe are some of the slower periods, all of these things are going to lead us to the conclusion that, I hope everybody agrees is the right one, you would take the money, even though the CPM might be a little bit lower.

Having said that, there is still a line in the sand for us that we won't go below, depending on the month. The thing that was difficult is May is traditionally, and it was this year, a fairly high attendance month. When you start taking lower CPMs when you've got high ratings or high impressions in this case, you really start to put at risk your revenue stream. That was one of the reasons that May was a bit of a tricky month for us.

Your first question is a really interesting one. Again, we did lot of work on second quarter to really dig into what was going on because, as you remember, there was a lot of confusion around what was really going on in the second quarter. Was the scatter market really strong or was the scatter market not strong but tight because the inventory levels, primarily the broadcasters of the rating points, had gone down? I think what we found was obviously the latter. There was almost a bifurcation.

The clients who like cinema, traditionally buy cinema, some of the sectors that I talked about, some of the car companies and so on, they're going to pay for the placement they want in cinema, and we're going to get a higher CPM. It's those clients that are new to cinema or are more price sensitive are the ones that we're really focused on right now. Quite honestly, that's one of the key aspects of our focus over the next several quarters is going to be getting those other clients, other types of clients that spend all year-round, maybe not at the higher CPMs; but as you can see, we've got a really pretty good core and base of clients, including our content partners, that pay good CPMs. That's the good thing for us.

I think the more we can bring a base of business on, much the way the broadcasters and the cable guys do their upfronts, the more we can bring that base on, the more flexibility we're going to have in the scatter market and we're clearly not where I'd like to be yet. At the start of every year, I think the start of this year we were somewhere around 50% sold, I'd like to be a lot higher than that. The upfronts, 70% or 80% of the inventory gets sold, and the upfronts may be even more.

Rich Greenfield - Pali Capital

But there's nothing unique from the standpoint of the types of advertisers meaning, it wasn't like the content partners who advertised with a much higher percentage and they are at a higher CPM that drove that 12 percent increase? I want to understand why it was so high.

Kurt Hall

In fact, as we talked about, one of the good factors affecting our second half is a lot of our content money this year was delayed into the second half. So, the only thing I can tell you is that, as you probably know, and this is true in television, there are a group of clients/sectors that are willing to pay higher CPMs because they want to get their ads placed when they want to get it placed. I think advertisers are also willing to pay higher CPMs when they're launching a product and the timing of these ads are critical.

As I mentioned, a big percentage of our revenue right now is related to our content partners and clients who are either doing special priority marketing or product launches or other type of things like that. All of those type of clients are willing to pay higher CPMs. Where we've got to go now is to figure out that next tier down of clients that are probably not as high up on the CPM rank, but are ones that are willing to spend in some of the time periods that are pretty soft for us right now.


We have a followup question from Barton Crockett with JP Morgan.

Barton Crockett  JP Morgan

I was wondering more specifically if there's any shading you're prepared to give us on the CPM growth in the second half or the utilization change in terms of [inaudible] parts of revenue there.

Kurt Hall

We aren't going to give that kind of detail at this point. Sorry about that. I think the farthest we're going to go for now on the guidance is with the revenue and the OIBDA.


We have no further questions. I will turn the conference back to our presenters for any additional or closing remarks.

Kurt Hall

I don't really have anything else to say. Thanks for joining us and thanks for your support. We're continuing to put this business forward, and I think we made a lot of progress in our third quarter results as we just showed you. I think they show a lot of growth in a time period when a lot of other mediums are actually declining. Obviously, that was a good sign for us; and we're going to continue to really push hard on this business.

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