National CineMedia, Inc. Q4 2007 Earnings Call Transcript

| About: National CineMedia, (NCMI)
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National CineMedia, Inc. (NASDAQ:NCMI) Q4 2007 Earnings Call February 28, 2008 5:00 PM ET


Brad Cohen - Investor Relations

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

Gary W. Ferrera - Chief Financial Officer, Executive Vice President


Eric Handler - Lehman Brothers

Hunter DuBose - Morgan Stanley

Scott Barry - Credit Suisse

Barton Crockett – JP Morgan

Eileen Furukawa – Citigroup

Lloyd Walmsley - Thomas Weisel Partners

Rich Greenfield - Pali Capital


Welcome to the National CineMedia, Inc. fourth quarter and year-end 2007 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Brad Cohen.

Brad Cohen

I would 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 in Section 21E of the Securities Exchange Act of 1934 as amended. All statements other than statements of historical facts communicated during this conference call may constitute forward-looking statements.

These forward-looking statements involve risks and uncertainties. Important factors that can cause actual results to differ materially from the company’s expectations are disclosed in the risk factors contained in the company’s filings with the SEC. All forward-looking statements are expressly qualified in their entirety by such factors.

Now, I’ll turn the call over to Kurt Hall, CEO of National CineMedia.

Kurt C. Hall

Good afternoon everyone, welcome, and thanks for joining us for our fiscal fourth quarter and full-year 2007 conference call. Today, I will be providing you with an overview of our progress against our quarterly and annual operating targets and key growth strategies. I will also share my thoughts on our 2008 growth plans.

Gary Ferrera, our CFO will then get into more detailed discussion of our financial performance for the quarter and full-year. And then as always we will open the line for questions at the end.

I will start with a quick review of our fourth quarter. Consistent with our solid performance throughout the year, we exceeded our Q4 internal targets and analyst’s consensus expectations with adjusted EBITDA growth of 18.2% over pro forma Q4 2006. Despite lower Q4 CineMeetings revenue, higher advertising revenue resulted in an increase in our adjusted EBITDA margins to 56.3% versus 51.4% for pro forma Q4 ‘06.

Our advertising business continue to benefit from the expansion of our network reach and broadening of our client base as media buyers look for new ways to market their brands. Our Q4 National inventory utilization grew to a 104.4%, while at the same time we increased our Q4 national advertising CPM’s by 2.1%. We also continue to see strong local advertising growth of 21.2% over pro forma ‘06, while local newspapers, spot television and radio advertising growth slowed or even declined.

It is important to note that our Q4 revenue growth was achieved during a quarter where the theatre industry attendance was down year-over-year, illustrating how our revenue is not as sensitive to attendance fluctuations. During the quarter, we managed our inventory very carefully to ensure we maximize the quarterly revenue potential.

Our operating performance for the year also exceeded expectations reflecting this fact that we delivered on virtually all of our strategic operating goals set forth during the IPO process. We strengthened our market position by expanding our network screens by over 8%, broadened our advertising client base and continue to improve the quality of our FirstLook pre-show by increasing the depth of our content partners.

We also began to plant some growth seeds for the future through our investment in IdeaCast and prepared for the launch of our Internet strategy in 2008.

With the continuing reallocation of media spending and a strong effort by our advertising sales group, we significantly increased our 2007 National inventory utilization to 87%, positioning us very well to absorb the over 1 billion additional annual advertising impressions we will bring on in 2008, with a full year of Goodrich and the addition of Kerasotes and Colorado Cinemas, and of course Loews starting on June 01.

While there continue to be quarter-to-quarter volatility in CPMs as expected, our CPMs for the year were up 1.6%. This was consistent with our plan to first focus on increasing sell-through by strengthening our network and building market demand to create more favorable supply/demand economics that will drive CPM growth.

While there has been a lot of discussion in the marketplace about the effect of the softening economy on the media business as reflected in our Q4 advertising revenue growth, the softening economy did not appear to have an impact on either our national or local advertising business. If we are being affected, we believe it is being offset by the overall shifts in media spending to new more measurable and effective digital media platforms like ours that are being viewed as increasingly favorable by media buyers.

With the expansion of our client-base we also now have several clients who operate in businesses that we believe are not as sensitive to the current economic debt slowdown such as the military, personal care, and telecom to name of few. We also have very little exposure to the real estate and financial market. Our local business may also be benefiting from our lower out-of-pocket price point as local clients can buy specific theaters in the trade areas surrounding their business rather than the entire DMA.

In addition, given our improving individual market coverage, our regional strategy had begun to more effectively compete with spot TV, radio and newspapers for entire DMA or multiple DMA buys. While all these factors are important, our solid national and local sales execution has been the most critical factor behind our success.

Our National sales team has both expanded the marketing commitments of our current clients and broadened our client base in categories that have not historically advertised in cinema. Our 2007 National client base included approximately 40 clients above the $1 million level across 22 categories and several clients that spend over $10 million with us. During 2006 we only had 33 clients above a million.

We made great progress in expanding under-penetrated categories as well such as packaged goods and personal care, quick service restaurants, food and computers, while significantly increasing revenues in some existing categories such as the military, telecom, movie studios, import auto, and games, toys and electronics.

During the end of end of 2007 and early 2008, we also completed new multi-year content partner deals with A&E, the History Channel, Warner Bros. and Disney. In some cases, these were former screen vision clients and thus will shift spending to our network in 2008.

The broadening of our content partners and higher quality ads has contributed to the increasing quality of our FirstLook pre-show which has improved audience acceptance and even approval based on customer surveys over the last several years.

We were particularly pleased with the 27.4% year-over-year growth of our local and regional advertising business in 2007, especially given the effect that the softening economy seems to have had another local advertising businesses. As with the case with our national business, sales execution played a significant role.

The effectiveness of our local sales force has improved as we focused on training and reallocating personnel to ensure that markets were adequately covered. While we also benefited from the strong summer films slate, our Q4 performance was still solid even without many Tempo Films.

Our annual meetings and events revenue increased to 11.4% over prior year and for the first time generated annual positive EBITDA. While 2007 CineMeetings revenue decline due to a significant Q4 2006 events with one client that was not repeated in 2007, Fathom events exceeded all expectations as we continue to expand our live network capabilities and diversify the sources and improved the quality of the programming.

During the second half of 2007, we significantly expanded our live broadcast capabilities to approximately 350 locations in 140 markets versus the approximately 130 locations in 75 markets during 2006 and most of ‘07. While the meetings and events business made up a small part of our total revenue and even smaller part of our EBITDA in ‘07 it is providing incremental EBITDA growth with very low capital expenditure requirement.

These businesses have also become an important factor when circuits are considering joining our advertising network as an affiliate. As we continue to expand this business as well as broaden our client-base and digital programming sources, we expect revenue and EBITDA to continue to grow, but to remain somewhat volatile quarter-to-quarter.

Looking ahead to 2008, our growth strategy is consistent with that laid out during our IPO process. We will continue to strengthen our digital network by expanding our reach in market position relative to screen vision and television networks, expand our advertising client-based across all categories, improve our pre-show for the benefit of theatre patrons and advertisers and expand our meetings and event business and create future growth engines by selectively investing in extensions of our advertising business that leverage our core competencies.

It’s our policy not to give specific financial forward-looking guidance, however, it is important to note that we face difficult comparisons with the first quarter of ‘07 when our pro forma advertising revenue increased 46% over Q1 ‘06 driven by high inventory utilization and the generally low demand first quarter and a strong increase in CPM’s. Part of this strength was related to a single large client who advertised heavily with us ahead of an important product launch.

This campaign will not be repeated in the first quarter of ‘08. In addition, as we mentioned on our last call Regal began acquiring only 60 seconds of inventory in January rather than 90 seconds for its Coke obligation. This 30-second reduction is expected to lead to a small committed beverage revenue decrease over the first two quarters of ‘08, but as market demand build this could provide revenue upside, as we’re able to sell this premium unit at a higher CPM over time.

Therefore we are anticipating that much of our 2008 growth will be somewhat back ended due to the challenging Q1 comp and the integration of Loews starting on June 1. While we are on track to meet our internal Q1 goal, the FirstCall consensus estimates for the first quarter may prove to be slightly aggressive given our difficult comparisons with the prior year.

Our local and regional advertising business continues to perform very well and we expect good Q1 revenue growth compared to the prior year. Our Fathom business is performing well in the first quarter with our new season of the Met and the surprise success of the Sprit of the Marathon event.

With all that said we are comfortable with current FirstCall consensus revenue and adjusted EBITDA estimates for the year. While we expanded our network in each of the last three years, 2008 will be a very exciting year for us as our network would grow to over 16,500 screens and our market share in the top ten and top fifty DMA’s as a percentage of total NCM’s Screenvision attendance would grow to approximately 70% and 65% respectively.

In addition to the growth of our core business as previously mentioned, we’ve begun to execute on specific revenue and EBITDA growth initiatives for the future that we have identified during the IPO process, including our $7 million preferred stock investment in IdeaCast and the launch of our Internet initiative.

While the early stage IdeaCast investment is not expected to have a meaningful effect on our results for few years, we believe our Internet initiative that will be launched later this year will provide more of a near-term opportunity.

Our ability to expand our FirstLook pre-show programming to the Internet and wireless devices provide our national and local sales team with unique inventory that can be immediately bundled and sold with our In-Theatre products or on an individual basis. With our ability to drive traffic with our In-Theatre marketing assets and leverage our existing sales, digital media and technology infrastructure, incremental revenue can be created with very little capital or operating cost investment.

It’s been a very busy, but successful year for us since our IPO. While there is always room for improvement, I’m very pleased that we exceeded both our operating and our financial goals in 2007, and have laid the groundwork for continued strong growth in the future.

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

Gary W. Ferrera

I will now spend some time reviewing our fourth quarter and the year-end financial performance in a bit more detail. Our discussion will focus on our pro forma result, but assume that the IPO and related transactions and the $805 million senior secured credit facility, were effective as of December 30, 2005.

In addition, you should also note that the effect of the Loews integration agreement is not included in our operating results, as those net payments are reported directly to our equity accounts. The Loews integration amount was $3.7 million for the fourth quarter and on a pro forma basis it is $11.7 million for the full year period ended December 27, 2007.

For the fourth quarter total pro forma revenue grew 7.8% to $94.5 million from total pro forma revenue of $87.7 million for the comparable quarter last year, advertising revenue increased 14.6% to $85.6 million for the pro forma ad revenue and up from pro forma ad revenue of $74.7 million for the comparable quarter last year.

Offsetting the slower growth of our meetings and events business, advertising revenue per founding member attendee grew 26.3% to $0.72 from $0.57 in the fourth quarter of 2006. This advertising revenue growth was primarily due to an improvement in both national advertising utilization and CPM.

Increases in local advertising times sold growth in the other on-screen inventory based revenue, and a higher land and lobby sales and the addition of Goodrich Theaters and the network affiliates during Q3 2007. All of this was somewhat offset by a decline in fourth quarter founding member attendance.

Advertising revenues for the fourth quarter of 2007 were made up of approximately 67% national advertising revenue, 21% local advertising revenue and 12% beverage agreement revenue. Pro forma for the year, these were 66% national, 19% local and 15% beverage.

Pro forma natural ad revenues excluding beverage grew 18.2% in Q4 ‘07 versus Q4 ‘06. Inventory utilization grew to 104.4%, compared to 93.7% in Q4 2006 and from 77.5% in 2006 to 87% in 2007. Our Q4 inventory utilization in excess of 100% reflects an increase in National inventory units above our standard eleven 30-second unit loads to meet market demand in November and December.

CPMs grew by 2.1% over Q4 2006 and 1.6% for the full year 2007, reflecting strong demand for our inventory that more than offset any competitive pressures. As Kurt previously mentioned, our current focus on increasing inventory utilization will continue to result in quarterly CPM volatility. It is important to note that our 2006 CPMs and inventory utilization have been recalculated to conform to the current year presentation.

We entered the quarter with approximately $830,000 of make goods. And as of the end of the fourth quarter we had approximately $4 million of make goods compared to $2.6 million at the end of 2006, a modest increase considering the drop in quarterly market attendance and very comfortably in line with our attendance base National advertising revenue.

Despite the softer film slate compared to last year’s fourth quarter, local and regional advertising had a strong quarter with pro forma growth of approximately 21% over Q4 2006. This growth was primarily driven by the improvements we have made within our local and regional sales teams and a small increase in the number of screens.

Our meetings and events business had a slow quarter, as revenue decreased 31% to $8.9 million from Q4 ‘06 pro-forma revenue of $12.9 million due primarily to a significant Q4 2006 CineMeeting event was one customer that was not repeated in 2007.

The CineMeetings decline was partially offset by a very strong quarter for our Fathom events business due to an increase in events and an increase of 42% in revenue per event. As we work to develop sufficient recurring event flow, revenues and profitability in these businesses will continue to develop over quarter-to-quarter.

Turning briefly to our pro forma expense line items, advertising operating cost decreased to approximately 3.4% of advertising revenues from 4.3% in the fourth quarter of 2006. Meetings and events operating cost increased to approximately 59.6% of meetings and events revenues in Q4 ‘07 from approximately 51.2% in Q4 ‘06 primarily due to the drop in revenues and the fixed nature of a portion of these costs. As well as allocation issues related to circuit share cost.

Network cost declined to 4.2% of total revenue in Q4 ‘07 from 4.8% in Q4 ‘06 reflecting the scalability of our network. Theatre access fees declined to 12.5% of advertising revenue in Q4 ‘07 from 18.7% in Q4 ‘06 due to decline in theatre attendance as well as comparability issues related to circuit share costs.

Selling and marketing expense increased to 13.8% of total revenues in Q4 ‘07 from 11.7% in Q4 ‘06 due to a variety of factors such as the increase in the higher commission base local and regional advertising revenue, as well as a decrease in the zero commission base beverage revenue. Administrative expenses increased slightly to 6.3% of total revenue from 5.9% in Q4 ‘06 due primarily to the cost of being a public company.

Total Q4 pro forma adjusted EBITDA excluding the Loews payments increased 18.2% to $53.2 million from $45 million in the fourth quarter of 2006 and increase 31.7% to $182.1 million from $138.3 million for the full year.

Adjusted EBITDA margin was 56.3% up from 51.4% during the same period in 2006 and finished the year at 53.9% versus 50.2% in 2006. Adjusted pro forma EBITDA including the pro forma Loews payment for the fourth quarter and year was $56.9 million and a $193.8 million respectively.

We continue to make great progress expanding our network. We’ve recently completed the digital deployment of approximately of 725 Kerasotes screens, which we discussed last quarter and have started the deployment of an additional 125 screen Colorado Cinemas with anticipated completion by the end of the first quarter.

As of December 27, 2007, we have 15,265 total screens in our network of which approximately 87% were connected to our digital network versus 81% at the end of 2006. These digital screens generate over 90% of our attendance. Our screen count now includes 2004 network affiliate screens which included the Goodrich and Kerasotes screens, but not the 125 Colorado cinema screens operated by Kerasotes, already approximately 1,200 Loews screens that will be added in June of 2008.

Pro forma for all of our announced screen additions network affiliated attendance will now approximate 10% of our total attendance. As we have noted in the past EBTIDA margins on affiliate revenue are lower than that from our founding member advertising revenue.

Concerning the issue of potential share dilution or accretion related to changes in screen count and attendance at our founding members theaters, these calculations are expected to be completed towards the end of March, based on the timeline in our agreements we will be sending notification to the founding members in late March, any adjustments we will settle in early April and will be disclosed at that time.

We believe there has also been some confusion regarding the addition of Loews screens in 2008. To be clear, we will not have the issue additional equity once Loews becomes part of our network. AMC received NCM LLC units related to Loews as part of the IPO and we have been receiving a payment from AMC to compensate us for the fact that we cannot sell advertising in Loews theaters on an exclusive basis.

We also wanted to clarify the agreement between us and Screenvision pertaining to the sale of advertising in the Loews theaters leading up to the June 1 conversion date. During May 31 the Loews inventory has been divided between us and Screenvision so it can be sold in an orderly basis by each of the sales teams.

We control the seven minutes closest to the film start time during the run-out period. These seven minutes will include inventory for Coke ads and the content segment. On June 1 the Loews screens will join our network on an exclusive basis and thus any advertising that’s been sold by Screenvision as of May 31, for the period from June 1 to November 30 will be distributed over our network and we can then sell any unsold inventory.

Our capital expenditures for the fourth quarter were $6.5 million and $15 million for the full year. This was lower than the guidance we’ve previously provided as some of the expenditures related to Kerasotes and the Internet initiative have been shifted to 2008 and included in the 2008 budget.

We estimate that 2008 CapEx will be in the range of $16 to $17 million assuming no additional network affiliate agreements are signed during the year. Regarding our balance sheet, our total debt outstanding as of December 27, 2007 was $784 million. Revolver balance net of NCM LLC cash and cash equivalents was approximately $51 million.

The interest rate on our $725 million term loan was approximately 7% for the Q4 period and 6.9% for the full year, while the interest rate on our revolver borrowings carried a slightly higher interest rate of 7.5% for the Q4 period and 8% for the full year. Our average total cash interest rate was 7% for both the quarter and the full year.

As we have previously mentioned in addition to the interest expense generated by the outstanding debt balance, there will be approximately $1.9 million per year included in our interest expense related to the amortization of debt issuance fees and expenses, and approximately $11.3 million of amortization related to our tax sharing agreement.

Our pro forma leverage at NCM LLC as of the December 27, 2007 is approximately $4.1 times, trailing fourth quarter pro forma adjusted EBITDA. Including the Loews payments down from approximately 5x at the IPO day, but we do not anticipate paying down our term debt, we will continue to deliver overtime through EBITDA growth and do not envision dropping to a leverage ratio of not less than 3x before reevaluating our capital structure.

We announced our quarterly dividend of $0.15 per share, equating to approximately 60% of our Q4 related cash distributions from NCM LLC, after adjusting for estimated income taxes and tax sharing payments. This dividend represents an annual yield of approximately 2.7% to 2.9% based on recent trading levels of our stock.

That concludes our prepared remarks, I will now open up the lines for any questions you might have.

Question-and-Answer Session


(Operator Instructions) We will go first to Eric Handler - Lehman Brothers.

Eric Handler - Lehman Brothers

You said you are comfortable with First Call revenue and the revenue EBITDA for FirstLook for ‘08, I am just wondering if you can clarify what exactly are those numbers?

And then secondly, when you look at your advertisers those that are coming on lately you are doing a good job there. I am just curious what is the retention rate of those advertise or more likely how many of the advertisers that have run ads in the last year how many of them returned to run another set of ads?

Kurt C. Hall

The retention has been, Eric, very seldom in fact I can’t even think of a National client that it hasn’t come back. Now they may not come back right away because they don’t have a product launch or they don’t have some sort of marketing initiative that fits our medium. But we haven’t had anybody do us and then call us back say they never going to use us again. So, I would say the retention rate is very, very high.

Gary W. Ferrera

Eric, I think the FirstCall number, I can’t remember what is was in revenue, I think it was around 206 on EBITDA, we’ll check that and answer it during another part of the call.


We will go next to Hunter DuBose - Morgan Stanley.

Hunter DuBose - Morgan Stanley

The first one is I believe that when you originally reported 4Q ‘07 you indicated that utilization was 100.2%, now I think it 93.7%; I think you said in your prepared remarks that there was some restatement. Can you talk to us about what that restatement was what drove it and how the calculation has been differently and does that have any implications for how CPM is calculated?

Gary W. Ferrera

Basically just what we did was, we went back over time, we had a new accounting team here as a public company. We went back over time and tried to go back and first do it make sure added value would being treated consistently throughout the years and that attendance in the calculations were being treated consistently throughout the year.

So, we literally went back and told all the contracts, we went through everything and made sure that everything tied out and so that when we are reporting 2007 versus 2006 that everything was on an apples-to-apples basis.

One other thing in there on the CPM side, I think the biggest thing on the CPM side is just making sure that added value when the National sales team goes out and sells, sometimes they’ll sell a whole package, it will include the land and the lobby, and there won’t be a stated price for it. So we wanted to make sure we went through and had all those treated accurately, so that’s basically what we did.

Kurt C. Hall

And just consistently treating the allocation of the contract revenue to all of the individual components, so, if you had, a lot of times, as Gary mentioned that the deal will give you so many units on the big screen, so many units on the land, may be some concessions and so on. And it was just making sure year-over-year that the allocations when they weren’t specifically identified in the contract, which they are often not, were done consistently year-over-year.

So that was what caused the downward conversion. Said another way for the ‘06 numbers, we obviously weren’t allocating as much to those other items as we had, as we were in ‘07.

Hunter DuBose - Morgan Stanley

And when did you start using this new calculation format, is that new for this quarter?

Kurt C. Hall

No, we’ve actually been doing it throughout this year.

Hunter DuBose - Morgan Stanley

They were from 1Q ‘07 onwards?

Gary W. Ferrera

No, we didn’t start doing it until reported at 03.

Hunter DuBose - Morgan Stanley

It looks like your network affiliates screens were up about 735 sequentially, I am just wondering where that came from?

Kurt C. Hall

Kerasotes screens are probably most of it. There is a little bit of Goodrich in there obviously, the Kerasotes 725 of them joined us actually on December 10, so that’s why they are in the year-end balance. But still another 125 screens that are part of their sort of sub network Colorado Cinemas that won’t join until 2008.

Gary W. Ferrera

And the 725 were not digital, they came on in December. We don’t typically install over the holiday, so those are the ones that we mentioned and just recently been fully digitized.

Hunter DuBose - Morgan Stanley

And to what extent would it be fair to assume that they were drivers of revenue for the quarter?

Gary W. Ferrera

Not much, very, very little because by the time they joined us on December 10, most of that inventory had already been sold but there was a little bit, not a lot.


We will go next to Scott Barry - Credit Suisse.

Scott Barry - Credit Suisse

Kurt you mentioned you weren’t seeing much in terms of the weaker macro environment, maybe you could comment on how the presidential election year and the Olympics may impact your business for better progress.

Then secondly, is there anything specific you can do to drive revenues in the seasonally weaker periods like the 1Q or is it just, is it just a function of continued expansion of the customer base.

Kurt C. Hall

I think the second question Scott is just continuing to drive the customer base and the more people we can get on board obviously everybody has certain parts of the year that they focus on.

One of the things that we did in ‘07 that really helped is that back-to-school sort of September/October period were very strong in ‘07, because we were able to build the business with JC Penny and other folks that focused on that time of year. We’ve got to do the same thing in the January through April period, because that’s obviously the other sort of soft period if you will, of the year. And so that’s the primary focus there.

The election and Olympic impact, now we’ve told everybody we don’t directly take ads for politicians and we will continue to not take them. However, we are hopeful that the combination of just the number of units that are being sucked up by those elections and the declining rating points of the networks that will contribute to some overflow business for us and I think that also will be impacted a little bit by the writers strike. Now that’s been settled obviously but there will be a delayed reaction in the marketplace as they get cranked back up and try to get some new shows back into the marketplace.

So we haven’t really seen second quarter breakout, it’s still little early for the scatter on second quarter and obviously everybody will start positioning for the upfront. So it will be interesting to see how that all plays out. The Olympics will probably help us from a content standpoint, because we’ve got our partnership with NBC that we’ll probably have some great Olympic material. Maybe there is a little bit of overflow benefit on the Olympics, but not a whole lot.

Gary W. Ferrera

And just to follow-up on Eric Handler’s question earlier, while we on the line here, the consensus was as we saw it was about $379 million for revenue and $206 to $207 on EBITDA.


We’ll take our next question from Barton Crockett – JP Morgan.

Barton Crockett – JP Morgan

I know you don’t want to get into the game of guiding too specifically for the first quarter, but given that we are so far into it now and given that there is such unusual comps with the year ago kind of Microsoft presence in or such kind of a skittish market environment and local advertising and outdoor “out of home” advertising environment. I was hoping you could give us a little bit more color.

So in particular, could you give us some sense of how utilization has been trending in January and February and imagine you had a pretty good view until the March pre-shows per National and that would be one question?

Kurt C. Hall

Clearly, as we’ve sort of indicated, we are anticipating that the utilization will be down a little bit from last year. Las year as you recall it went up by 20% year-over-year from ‘06 to ‘07. So that one client that you just mentioned sucked up a lot of inventory.

We did benefit a little bit from the fact that we had the $4 million of make good carrying over and we obviously had plenty of theater attendance to take care of those make goods in the first quarter, 100% of it will get taken care over the first quarter because some of the clients wanted to defer into some other periods, but so we benefited from that a little bit. So I don’t think there was any other color we can really give you other than kind of what we have.

Gary W. Ferrera

That get weighted, I think, one of the things I’ve done on some of our conferences was put up a chart and I believe it’s on our website of historical trends, revenue and EBITDA throughout the quarters and I mean last year as Kurt had mentioned, it was abnormally high in Q1 than it normally had been let’s say if you looked at 2006 and we’ll probably return something back to more to normal.

Barton Crockett – JP Morgan

Is net of it you think still growth in EBITDA in the first quarter?

Kurt C. Hall

We are not going to comment on that. We don’t give guidance.

Gary W. Ferrera

It’s too early for us to tell.

Barton Crockett – JP Morgan

And then to this restatement issue, could you just give us what another restated utilization number would be for the first quarter of ‘07 and the second quarter and is there any change to the attendance as part of the restatement or not?

Kurt C. Hall

No, it’s not attendance based, it’s purely just the allocation of revenue between various components because in any contract you have revenue that affects the CPM and the utilization. That’s the onscreen revenue, and then you have land and lobby and some other things that are obviously don’t have any impact on the utilization and the CPM. So when you allocate on a consistent basis year-over-year those numbers that’s what caused the number in ‘06 to be recalculated effectively.

Barton Crockett – JP Morgan

But, can you give us what the recalculated utilization is for the first and second quarter of ‘07?

Gary W. Ferrera

Last year I believe it was 66.2% is what we had reported and it was actually higher, it was approximately 70.1%.

Barton Crockett – JP Morgan

You said that you think the consensus for the first quarter may be a tad high; can you just clarify what you are using as your consensus view there?

Gary W. Ferrera

I don’t know if there is if we’ve seen a FirstCall consensus. What we saw in the research report, I think that everybody is not shifting towards the back or end of the year as Kurt had mentioned is more normal for us.


We will take our next question from Eileen Furukawa - Citigroup.

Eileen Furukawa - Citigroup

First, regarding the box office what you saw on the fourth quarter, can you tell us was there any pattern on what was going on here, was there any sort of regional patterns, small or larger markets, certain partners. And then also within your ‘08 consensus numbers what kind of attendance growth or decline were you considering.

And then on utilization, your 104% utilization, were there any particular large ad buy from one or a handful of particular advertisers that really push this up that was a more widespread, and similarly what kind of national utilization did you consider in coming up with your ‘08 guidance?

Gary W. Ferrera

Let me answer the last question first. The fourth quarter there was one big client, the Army National Guard. There was a three, 3.5-minute piece depending on whether we are talking about November or December that ran. We actually bought back I think almost a 100% of the Coke inventory in December to make that work and we also had a content piece in November that made that work.

So they were a very large client, but having said that, they didn’t actually suck up a lot of the inventory that is included in the utilization, because some of that was sucked up by our content piece and some of that was sucked up by Coca-Cola, the buyback of the Coke inventory which we made a little bit of a spread on. So that’s the answer to that.

The box office attendance in the first quarter has just been very strong and fourth quarter is very back-ended. The last two weeks were very, very strong and then that rolled over into the first quarter and there has been a number of films that I think have been upside surprises in the first quarter as well.

So I don’t know what else to say, there doesn’t seem to be any local or regional patterns, it just seems to be movies that people want to see and after the box office sort of exploded right at the Christmas period and that momentum is just carried right on into the first quarter. The attendance growth that we’ve got in the 2008, I think most people’s view is that its flat year-over-year and I think that’s what we have in our budgets effectively.

Eileen Furukawa - Citigroup

And what’s your national utilization you are considering for your ‘08 guidance?

Gary W. Ferrera

No, we don’t give that out, sorry.


We’ll take our next question from Lloyd Walmsley - Thomas Weisel Partners.

Lloyd Walmsley - Thomas Weisel Partners

I was wondering if you could just comment a little bit on the terms of some of these new content partnership agreement. It is sort of the first question and then taking a broader view if you were to lump the content segments in with the required advise and look at it as a blended overall CPM, if you could talk about how those compared to your overall CPMs with the question in mind over time if you were to take back inventory from the content partners, what sort of opportunity could there be there?

Gary W. Ferrera

Well, Lloyd there is a lot of speculation going on in there. Obviously, we don’t have any plans to take back any inventory at this point. We have our content partner slots that we sell directly that are that we have the rights to do today and we’ve been reasonably successful doing that.

As far as the content partner terms I’m obviously not going to talk about them. All of them are two years whenever we do a content partner deal or renew it it’s always a two-year deal. That’s about as much detail as I want to get into it and as far as trying to figure out what the actual CPM is, it’s not really, and it’s not sold that way. We basically sell a package that comprises time that people give us content in and they sell and they buy National units on an individual basis.

For us, it’s a great deal, because we’ve pre-sold a bunch of our inventory and we get our programming for free. And I am sure on their side they do exactly what you are alluding to which is take all of the time and take the money that they pay us and do the division, and it looks likes an attractive CPM. But for us we can’t really look at it that way, because we are getting content and programming if you will at no cost.

So I think that’s yes that covers all the questions that you had I think.

Lloyd Walmsley - Thomas Weisel Partners

And there is no, if you look at the UK, for example where the quality of the advertising is often viewed by the consumers as content. If the ad quality over a long term period were to get to that point, would it make sense or is the economics of the content partnerships now, does that not leave a lot of room on the table for.

Kurt C. Hall

Well, clearly if we took the whole 2.5 minutes and took it out of the show and just sold it as inventory there could be revenue upside there. But I think we have to very carefully balance the effect that that has on the show both from a customer standpoint, which is very important obviously and from a clutter standpoint, because the one thing that a lot of advertisers like the cinema for is the fact that there is not a lot of clutter.

Now, one thing that we have been doing is promoting the creation if you will of longer form advertisements, 60s and 90s. And in fact one of the criteria that we use to add an additional unit as we’ve said, we will go up as much as thirteen 30-second units.

One of the criteria we use is do we have other long form advertising involved in the pre-show, so that it doesn’t feel choppy 30-second ads back to back to back to back feel very choppy. What we are able to do in both November and December, because of the long Army Channel Guard ad, the show had this long form advertising in it and we were able to able to obviously add a unit without making the show feel choppy.

So there are a lot of factors that come into this. Clearly it will all comedown to how creative and how entertaining do the advertisement themselves get. How long do they become and so on, because you are correct that, if that all happens there may be inventory available for us to free-up overtime.


We will go next to Rich Greenfield - Pali Capital.

Rich Greenfield - Pali Capital

When you look at the 10-K, you have historically said that I think 16% of your revenues fall in the first quarter. I just want to confirm Gary what you were saying before, when you look at the full year numbers assuming that 10-K comment is accurate that we should think about 16% of revenues in 2008 falling in Q1 relative to the disproportion of amount that fell in Q1 ‘07.

And then second question for Kurt, when you look at new advertiser sort of platform in the fourth quarter, what you may have already seen in Q1 and only thing that maybe on the docket looking at over the next several months. Could you just talk to some of the big brands or names that you have seen come in for the first time ever into CineMedia advertising?

Gary Ferrera

Rich, on the question on sort of waving in each quarter, the best thing I could say to do is, we have a slide show on our website that lays out ‘06 and ‘07 using the consensus estimate, its not our final numbers but pretty close. That lays out revenue and adjusted EBITDA quarter-to-quarter for both ‘06 and ‘07.

And I think the number for ‘06 was in the 9% range for EBITDA and in ‘06 and then 14%, but I’ll just go back and clarify that for ‘07. I guess my point was just had to give more inline with ‘06 or it’s more back weighted in the end of the year.

Rich Greenfield - Pali Capital

I was talking revenues, the additional seasonality of revenues?

Gary Ferrera

Well, it’s similar just the fact that there is some leverage in the business and why the EBITDA ones are low. But the ones on the revenue base if you look at that it would be probably similar situation.

Kurt C. Hall

In the new advertisers Rich, I mean we talked about a lot of these, but JCPenny was a big breakthrough in ‘07, Wendy’s was a big breakthrough in ‘07. We’ve had a bunch of electronic companies come in like LG, a lot of video gamers come in, and toy manufacturers come in.

So, I think we have had a pretty good run of new people who are coming in and that’s really what’s driving our growth. And hopefully we’ll continue to see that and as I said before, we have had some of these clients already come back to us to advertise in ‘07 and look at trying to secure units not only in ‘08, but also in ‘07, in ‘09 rather. So, we’ve had some little, well, I’ll call it mini upfront deals with some of those clients. So I think that’s a very positive thing.

Rich Greenfield - Pali Capital

Any key categories you think you can target in ‘08, ‘09, especially as you have loads?

Kurt C. Hall

Procter & Gamble to me is the whole package goods industry is one that is a huge spender and we really have in other than, personal care products like Axe and a few other brands. That whole category and Procter & Gamble it’s obviously a client that’s a big target for the industry, but the whole package goods category I think is the big one.

Other than Wendy’s we haven’t done a lot on the quick serve restaurant either. So I think those two categories I am hopeful that we can get into. And there is some pretty key clients out there that have never spent in cinema like Apple. And with great target, with great creative, they just have never gotten into cinema and given their creative. They would be a perfect fit for cinema and we are working hard on those kind of clients.


Next we’ll take a follow-up from Barton Crockett - JP Morgan.

Barton Crockett – JP Morgan

I was wondering if you could give us some sense of, at this point what percent of your available normal ad slots have already been sold to kind of preset contracts with the content partners any other type of long-term or due to what sort of contracts that you have?

Kurt C. Hall

I think what we say, it’s actually disclosed in our 10-K, which will be out in a few days. But between the content partners and the Coca-Cola commitments it’s 36%, sort of mid-to-high 30% and 33% or 34% total advertising revenue. You can probably assume it’s maybe little bit higher in that.

The one thing that we did mention is in ‘08 we have got back at 30-second unit from Regal, so that will offset some of the beverage growth and beverage was growing at 8% a year. So that will offset a little bit of that growth.

Barton Crockett – JP Morgan

But still you think it’s anything up a little bit from what it was in ‘07?

Kurt C. Hall



Next we will take a follow-up for Hunter DuBose - Morgan Stanley.

Hunter DuBose - Morgan Stanley

Can you give us any guidance about how we should be thinking about the treatment for Regal acquisition of the consolidated leader team, in terms of this being set up as sort of a Loews touch structure where they get the incremental equity upfront and make payments to you versus something holding up until the Screenvision contract expires?

And then the second question I have is that, there was an recent AdAge article commenting that the media of that agency was concerning shifting up to a $100 million broadcast advertising contract to cinema for this year.

And I am wondering if you have seen any indications of that and have you seen any indications that other agencies maybe considering from the similar in response to Hollywood writers strike, which it has ended but it may continue having an impact on the programming slide for broadcast for another few months?

Kurt C. Hall

On the Regal thing, Hunter, we have not heard anything from Regal and you stated it correctly, they have the option to sort of go the Loews route, I mean pay us a fee if you will and it’s exchanged for equity. We have not heard anything from them on that.

We won’t get access to consolidated, we don’t know what the actual dates are, but we think its two to three years from now from an actual sales standpoint. On the AdAge article, there have been lots of conversations with the agency. I think it was Media West that was mentioned in the story and other agencies about the idea of them doing sort of many upfront with us that they would then divide across their various clients.

I don’t have any deal to report although as we talked about we have been doing some deals directly with some clients with the agencies involved, as well where they have bought multiple flights in ‘08 and in ‘09, as well in one case. So those conversations have been ongoing for quite sometime and yeah, we will just have to keep pushing on it. It was obviously a very, very good news.


And at this time there are no further questions. I would like to turn the program back over to Mr. Kurt Hall for any additional or closing comments.

Kurt C. Hall

I don’t have any big things to say other than thank you to everyone and we will be talking to you soon as Gary mentioned. Sometime this spring we will be finalizing the calculations for the circuits that have been alluded to with respect to the new theaters net that they have brought into the company over ’07. And so we will be getting back to you on that and just stay tuned a lot of really exciting things going on for the company. Well, thanks.

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