National Cinemedia Inc (NCMI) 2007 Q2 法說會逐字稿

(OPERATOR INSTRUCTIONS). As a reminder, this call is being recorded today, Thursday, August 9, 2007. I would now like to turn the conference over to Ms. Nikki Sacks with ICR. Please go ahead, ma'am.

Good afternoon. I would like to remind our listeners that this conference call contains forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 as amended, and Section 27-E of the Securities Act of 1934, as amended. All statements, other then statements of historical facts communicated during this conference call may constitute forward-looking statements. These forward-looking statements may 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.

I would now like to turn the call over to Kurt Hall, CEO of National CineMedia.

Thanks, Nikki, good afternoon everyone and welcome and thanks for joining us for our second-quarter conference call. Today I will be providing you with a quick overview of National CineMedia's second quarter 2007 operating results and I will discuss the progress that we're making against some key growth strategies and business development initiatives. Gary Ferrera, our CFO, will then get into a little more detailed discussion of our financial performance for the quarter and year-to-date, and then we will open the lines for any questions that you may have.

We had a very busy quarter as we made significant progress against our internal operating goals and continued to execute against several strategic growth initiatives. In addition, as we announced, we declared our first quarterly dividend. At $0.15 per share, this quarterly dividend reflects our strong year-to-year performance and our future outlook and provides ample room for us to invest in various of our growth initiatives.

While we expect to declare future quarterly dividends, such dividends are always subject our operating results, future prospects and approval of our Board. The slightly lower than expected national advertising revenue for the quarter due in part to a soft April and a shifting of content partner media commitments to the second half of the year, pro forma adjusted EBITDA and forma earnings per share grew 20% and 36%, respectively as our local and regional advertising and Fathom revenue exceeded expectations and we had tight cost controls resulting in lower operating expenses.

As we have mentioned previously, the expansion of our network and broadening of our advertising client base will results in variability with respect our quarter-to-quarter national inventory utilization and CPMs. For the six-month remind, both of those metrics are tracking as expected for the year, resulting in an increase in pro forma adjusted EBITDA of over 40% on revenue growth of 28%, an increase in pro forma adjusted EBITDA margin of 460 basis points to 49.7%.

The market demand for cinema advertising continuing to build, we continue to aggressively pursue the expansion of our theater network through network affiliate relationships with larger regional theater circuits. During the quarter, we made another important addition as Kerasotes Theatres agreed to join our network in 2008 upon the expiration of their current agreement with Screenvision. You should note, however, that the 125 Denver market screens included in the Colorado cinema circuit owned by Kerasotes will join our network in January of 2010 upon the expiration of their Screenvision agreement subject to the usual runout provisions.

Kerasotes Theaters, including the Colorado cinema screens, is the sixth largest theater operator in the United States with 95 theaters and 853 screens in several top 25 markets, including Chicago, Denver, Indianapolis and Minneapolis. The expansion of our network with the Kerasotes and Goodrich Theaters announced previously, when combined with the Loews addition in 2008, will improve our ability to more effectively compete for national advertising budgets currently allocated to television and other national media networks and help us increase our market share of current cinema advertising expenditures.

With the expansion of our network and underlying impression base, we continue to focus on expanding the marketing commitments of our current clients and broadening our client base in categories that have historically not advertised in cinema. I'm very pleased with the progress that our sales team has made in this area. Several of our existing relationships in the foreign auto, armed services, personal care, telecommunications and entertainment categories have increased their spending while we have begun to make significant progress in several new areas in domestic auto, QSR, toy, retail, package goods and financial categories.

As mentioned, our local and regional advertising and Fathom event businesses outperformed our expectations with approximately 47% and 263% year-over-year second quarter revenue growth, respectively. The local and regional advertising growth was largely driven by the high number of tentpole films during the quarter. While the film mix was important, we also benefited from lower than expected client churn from the newly added Century Theaters and better-than-expected sales levels from newly added sales personnel. Over the last year, we've worked very hard to weed out underperformers and ensure that markets are being adequately covered.

Our CineMeetings business continues to post strong year-over-year growth and the Fathom events business has performed well above our expectations to date. This growth was driven primarily by the continued expansion of the live network capabilities and our efforts to diversify the sources of content. During the quarter, there were a number of successful events, including the last of the New York Metropolitan Opera six series event, a marketing event for the re-release of the Dirty Dancing 20th anniversary DVD release, a series of Dale Earnhardt NASCAR events and an Anime digital animated event. With our success in expanding the number of events and diversifying the types of events, and the recent signing of an eighth event exclusive relationship with the Met for next year, we have begun to more aggressively expand our live capabilities across existing founding member theaters and other network affiliate theaters. We're on track to increase our live network from approximately 118 theaters currently to 3 to 400 locations across 129 markets, including 48 of the top 50 DMAs by the end of this year. This greater distribution capability is expected to allow us to attract additional high-quality content offerings and increase the Fathom revenue and profitability as we better leverage our existing fixed cost base.

In addition to our initiatives that are focused on expanding our existing core business within theaters, we've been studying several of the new fast-growing emerging digital media networks to expand our advertising reach beyond theaters. This process involves a review of several companies and in June we made our first investment in a company called IdeaCast, an operator of advertising networks in health clubs. We believe that IdeaCast provided the best fit with our strategic investment criteria. In general, we were looking for networks that provided a favorable early stage valuation and many operating attributes that are similar to those of our theater network, including an environment where consumers can be engaged for extended periods of time, a favorable relationship between deployment costs and CPMs, a high number of endemic advertisers, a reliable audience measurement mechanism and a high-quality sales force.

We also wanted a network that had adequate national coverage, something lacking in almost all of the new digital networks that we looked at. IdeaCast currently operates an advertising network in over 600 health clubs with another approximately 350 plus waiting to be installed. In aggregate, these clubs represent about 200 million club visits per year across 47 of the top 50 DMAs and approximately 117 DMAs in total. Given this national coverage and advertising impression base, it was one of the few new digital networks that could support a fully functioning in-house sales force. This was important to us as it will allow the NCM sales team to focus on selling our cinema network. While IdeaCast is operated separately from NCM, we are exploring several sales as well as technology synergies that we believe benefit both companies.

We have structured our IdeaCast investment in two parts -- a $7 million of 6% pick preferred stock, $5 million of which we have already, and an option to acquire common stock such that our total ownership would equal 50.1%. The structure allows us a lot of flexibility to grow our investment as the business progresses. It also provides an incubation platform for NCM to participate in the growth associated with these new emerging digital media platforms, limiting earnings dilution for NCM and allowing our management team to focus on expanding the theater platform.

So far, the reception for IdeaCast from the marketplace has been very positive with their sales team holding as many as 30 to 40 sales meeting per week. However, we're not expecting any meaningful sales until later this year due to the lead times associated with the national advertising sales process. While we believe that IdeaCast will provide a meaningful future growth engine for NCM, we expect to have equity accounted losses over the next several quarters during its initial sales ramp-up period.

Moving to the remainder of the year, we have already exceeded our Q3 internal advertising sales targets as the national scatter and local and regional markets have been very strong, and we have benefited from the higher allocation of content partner commitments to the second half of the year. We also remain very bullish about theater attendance as the third quarter is off to a very strong start with the huge opening and subsequent demand for the new Harry Potter film and surprisingly strong openings for the new Simpsons movie and the Bourne Ultimatum film.

With the 90 seconds of FirstLook inventory already contracted from our founding members to fulfill their beverage agreements, we currently expect to achieve our internal advertising revenue targets for the year. Remember, however, that certain of our advertising contracts have options to cancel and/or change the placement up to 90 to 120 days prior to the play date and are always subject to [make good].

Now I will turn over the presentation to Gary to review our financial results.

Thank you, Kurt. I will now spend some time reviewing our second quarter financial performance in a bit more detail. As on previous calls, I will be discussing National CineMedia's historic and pro forma results. All results prior to February 13, 2007 are not comparable to our results after that date as they do not reflect the effect of our IPO, bank financing and the concurrent change in the ESA and operating agreements which closed on February 13, 2007. Therefore, in order to facilitate comparisons between periods, we have also provided pro forma results.

I will begin briefly with our historical results. For the second quarter of 2007, total revenue increased over 46% to $83.7 million due in part to the new beverage agreements and growth in our various businesses. During the quarter, net income was $6.3 million compared to a net loss of $1.2 million in the second quarter of 2006. The improvement in our historical operating results over Q2 2006 was due primarily to significant revenue growth and lower payments to our founding members' exhibitors. These benefits were partially offset by higher meeting and events operating and selling and marketing costs associated with the higher revenue generated, a planned increase in administrative costs due the to Company's IPO and interest expense related to our new debt facility and our tax sharing agreement and deferred tax expense.

We also recorded minority interest of $10 million.

As these historical are not comparable with the periods prior to the IPO, the remainder of my discussion will focus on our pro forma results that 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 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 is approximately $2.8 million for the second quarter of '07 and on a pro forma basis is $4.1 million for the first half of 2007 and is estimated to be higher for the second half of the year resulting in approximately 11 to $12 million for the total year.

For the second quarter ended June 28, 2007, revenue grew 14.7% to $83.7 million from pro forma revenue of $73 million for the comparable quarter last year. Advertising revenue increased 12.6% to $76.6 million for the Q2 '06 pro forma -- from the Q2 pro forma ad revenues of $68.1 million. Pro forma advertising revenue per founding member attendee grew 12% from $0.50 to $0.56 per founding member attendee. This growth was primarily due to the increase in sales of national branded content segments and other non-inventory based national advertising revenue, strong growth in local and regional advertising sales and the increase in screens and impressions resulting from the growth of our network. Advertising revenues for the second quarter of 2007 was made up of approximately 65% national advertising revenue, 20% local advertising revenue and 15% beverage agreement revenue.

Though national ad revenue excluding beverage grew approximately 7% in Q2 '07 versus Q2 '06, some of the national advertising metrics we track were down slightly. Q2 '07 inventory utilization of our 11 national 30-second units was 82.5% compared to 83.9% in Q2 '06, and CPMs decreased 5.5% from Q2 '06. These decreases were primarily the result of a delay in the scheduling of certain of our content partners' ads from the second to the third and fourth quarters of 2007.

In addition, we chose the path on a few accounts where we did not want to compromise our rate card. These declines were offset by increased revenue from the sale of branded content segments and expansion of the cell phone PSA in all our founding member circuits. As a reminder, CPM growth can vary quarter to quarter due to our efforts to promote adoption of the cinema advertising medium, the allocation of content partner commitments throughout the year and market pricing pressures.

As evidence of this our, year-to-date CPMs are basically flat and utilization is at 74.7%, up from 66.9% in the first six months of 2006. Our focus on utilization increases versus CPM is consistent with our plan to increase adoption of the cinema medium. You should also note that our make-good balance at the end of Q2 '07 was $1.7 million versus $2.6 million at the end of 2006.

Local and regional had an excellent quarter with pro forma growth at approximately 50% over Q2 '06. This growth was driven by the large tentpole films during the quarter, lower client churn (inaudible) on Cinemark and Century and a very high-quality focused local and regional sales team.

As I mentioned earlier, some of the year-over-year revenue growth was due to the addition of screens to our network. In Q2, it was due to the full benefit of the addition of the Century circuit which Cinemark acquired in October 2006. We completed the Century Digital network deployment toward the end of February 2007 and began realizing meaningful revenue from the additional Century impressions at the end of Q1 2007.

When assessing the effect of the new circuit additions to our network, you should note that [it was due] to the lag between the time we add screens to our network and then complete the digital [performance] to when we began earning revenue.

Meetings and events revenue growth 42.9% to $7 million from Q2 '06 pro forma revenue of $4.9 million due in significant part to the success of several Fathom events across multiple product categories. During the current quarter, the CineMeetings revenue performed in line with Q2 '06 and increased nearly 20% year-to-date. CineMeeting's events were held in approximately 1850 locations during the current quarter with average meeting revenue per location of approximately $2200. We also distributed Fathom events to roughly 2100 sites which is a significant increase over the approximately 600 sites in Q2 '06 while at the same time generating approximately 12% more revenues per site.

Pro forma adjusted EBITDA, excluding the Loews payments, increased 19.7% to $46.7 million from $39 million in the second quarter of 2006. Adjusted EBITDA margin was 55.8%, up from 53.4% during the same period in 2006, reflecting the operating leverage of our business. Adjusted pro forma EBITDA, including the pro forma Loews payment for the quarter and six months, was $49.5 million and $76.5 million, respectively.

Turning briefly to our expense line items, advertising operating cost as a percentage of advertising revenues of 2.9% decreased by 60 basis points from 3.5% on a pro forma basis in Q2 '06. Meetings and event cost adjusted for revenue share of payments to founding members decreased as a percentage of meetings and events revenues from approximately 61% in Q2 '06 to approximately 56% in Q2 '07. Network cost as a percentage of total revenue declined from 5.3% in Q2 '06 to 4.4% in Q2 '07. Due to the semi-fixed nature of the cost, theater access fees declined from approximately 17% of advertising revenue in Q2 '06 to 15.6% of advertising revenues in Q2 '07.

Selling and marketing costs also declined as a percentage of total revenues from 13.3% in Q2 '06 to 12.3% in Q2 '07 due to the semi-fixed nature of these costs. Administrative expenses increased slightly from 5.5% to 6.3% of total revenue primarily due to increased costs associated with being a public company. Minority interest expense associated with our founding members' ownership interest after the IPO was $10 million for Q2 '07. This amount represents pretax income of NCM LLC net of an assumed tax rate of approximately 40%, times the 55.2% ownership interest in NCM LLC of our founding members. It is important to note that the NCM LLC pre-tax income for tax purposes differs from that reported in the consolidated amounts due to the interest expense related to the tax sharing agreement which is approximately $2.8 million for the quarter and $11.3 million for the year.

As of June 28, 2007, we had 14,137 total screens in our network, of which over 87% were connected to our digital network versus 85% at the end of 2006 -- second quarter 2006. Currently, over 90% of our attendance is digital. Our screen count includes 1006 network affiliate screens and does not yet include the Goodrich screens, which will be added to our network during the third quarter of 2007; the Kerasotes screens, which will be added in early 2008; or the Loews screen that will be added in June of 2008.

As we continue to expand our network through affiliate deals, it is becoming a more meaningful part of our EBITDA growth and is expected to provide attractive returns on our investing capital. While we expect that our incremental network affiliate revenue per advertising impression will be slightly lower than our total advertising averages, our incremental EBITDA margins are expected to be approximately 40 to 45%. This is lower than the EBITDA margins generated our founding members' screens due to the founding members' beverage agreements, the amount of available inventory and the revenue sharing structure. Each deal is negotiated and structured differently depending on the size of the circuit, the markets covered and the capital investments made by us and the affiliate. The total required in-theater investment per screen to connect to our advertising network is approximately $10,000 per screen.

As we mentioned on last quarter's call, we expect to spend approximately $2.7 million in Q3 for the Goodrich upgrade and we now expect to spend approximately $3 million, or approximately 40% of the total Kerasotes CapEx requirement in the upcoming Q4.

With the addition of the Kerasotes theaters excluding Colorado Cinemas and previously announced Goodrich Theaters on a pro forma basis, our total network affiliate attendance base will increase from approximately 5% of our toll attendance base to approximately 10%.

Moving on to our balance sheet, our total debt outstanding as of June 28, 2007 was $768 million. The revolver was at $43 million at quarter end and our current net revolver [is at] approximately $23 million as of today. Our interest rate on our $725 million term loan was approximately 6.8% for the Q2 period. Our revolver borrowings carry a bit higher interest rate at LIBOR plus 175 basis points.

I would like to highlight that 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 the tax sharing agreement discussed previously.

Our pro forma leverage at NCM LLC as of June 28, 2007 is approximately 4.5 times, trailing four-quarter pro forma adjusted EBITDA, including the Loews payments. While we do not anticipate paying down our term debt, we will continue to delever over time through EBITDA growth and do not envision dropping to a leverage ratio of less than three times before reevaluating our capital structure.

As Kurt mentioned earlier, we announced today our first quarterly dividend payment of $0.15 per share payable on September 6, 2007 to holders of record on August 23, 2007. This amount equates to 100% of our Q2 '07 EPS and approximately 80% of our Q2 related cash distributions from NCM LLC after reserving for income taxes and tax sharing payments. The dividend has been set to allow us to return cash to shareholders while providing flexibility for management and our Board of Directors to evaluate investment opportunity that could provide incremental growth, including capital expenditures associated with the expansion of our network affiliate relationships and selective investments in new media networks, such as IdeaCast. You should also note that this dividend represents an annual dividend yield of just under 2.5% based on the recent trading levels of our stock.

As mentioned on previous calls, we do not plan to provide specific quarterly or annual revenue, EBITDA or net income guidance now or in the future, but we will continue to provide enough key modeling building blocks to help you understand our business. To this end, looking forward, we currently have commitments for approximately 100% of our national advertising revenue target for the second half of 2007 while local advertising is at approximately 100% for Q3 and pacing well for Q4. However, as we mentioned earlier or previously, these commitments are always subject to make-goods at the end of any quarter which could result in a deferral of revenue or a refund in the subsequent quarter.

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

(OPERATOR INSTRUCTIONS). Eric Handler, Lehman Brothers.

Can you give us a little more available information? Was there is specific reason why your content partner delayed to the back half of the year? And then secondly, your dividend of $0.15 was a nice surprise relative to what you had been previously talking about. Was there a specific reason for that? And given that your language is a little vague, should we just assume that $0.15 is a good number to use going forward?

With respect to the content partner shift, Eric, it was just all about their marketing priorities and I don't really obviously know what all of their marketing priorities are, but clearly they have the flexibility in our agreements with them to allocate the money that they commit to us each year pretty much any place they want within the year. And that's oftentimes done upfront and then they move it around as their marketing priorities change throughout the year. So that is really all I can say on that.

As for the dividend, I think we gave about all the information we can give. Obviously we're pretty happy with the way things are going. And as we said, you got some good news for the rest of this year and we're just continuing to see a good build in the demand for the product. I'm also obviously very happy about the fact that we continue to add to our network and I think the implications of that across the marketplace are obviously good. Whether or not you can assume that will stay where it is going forward is entirely up to you. I think it's a little hard for us to say anything on that.

Hunter Dubose, Morgan Stanley.

First of all, could I ask you to help us quantify the impact to utilization and CPMs in the second quarter from this delay and the content partner and advertising contracts revenue? Second of all, how should we be thinking about the impact on the third and fourth quarters of that delay? Is it additive to the revenues you would have otherwise had, or does it simply shift everything forward by a quarter?

Well, it obviously shifts money out of, in this case, second quarter into the third and fourth quarter. So as we indicated in our comments, the national advertising is at 100% or more of our internal target. And so it has been additive obviously to that. I think you have to look at your projections for utilization in third and fourth quarter. And if what we have said, it looks like we are higher, some of that is obviously related to these content partner monies shifting over. Each year, these guys are going to have different priorities and probably mostly based on their film release schedules. So what quarter the money may fall into is always going to be variable year-over-year and it's something we have been guiding you all for the last several quarters and that is one of the factors that will shift around our utilization and CPMs in any given quarter. So unfortunately it's just part of our business. The good news is, the commitments are to spend the money within any calendar year. So that's the one good thing we know.

Alright. If I could ask a follow-up question regarding CPM growth in the quarter. Given how tight the TV scatter market was for the second quarter, I was a little bit surprised by the directionality of the national CPMs for the quarter. Does that reflect the fact that Q2 '06 scatter market impact on your CPMs was actually quite buoyant? And could you also comment on third quarter '06 and fourth quarter '06 impact of the scatter market on your CPMs as well, just so we have a sense of the comps?

Clearly if you start looking at the numbers, and you have enough now that we've publicly released, you can see that last year's second quarter was incredibly strong and a good scatter market, and last year's third quarter was not only weak in the cinema, it was weak across the whole marketplace. Some of that has shifted around this year. Not quite sure what the reasons are. If you look at our second quarter of this year and break it down, April was the real tough month for us, both from a revenue and a cash flow standpoint. So as we've indicated in the past, as we're continuing to build demand for the cinema product, there's going to be a month here and there throughout the year that there just isn't enough demand out there to fill out all the inventory. So if we were to release monthly results, that's probably what you will see, that a lot of the variation in whatever you may have been expecting fell in the month of April.

So just to make sure I'm understanding you, am I hearing that, in terms of scatter market TV comps for the second half, they start to look a little bit easier now?

Yes. I think clearly last year's third quarter was a weak third quarter for us, which we have already disclosed to everybody. So you can say that that provides an easier comp for this year's third quarter. You obviously would have to determine that, not me.

Okay, thanks guys.

(OPERATOR INSTRUCTIONS). James Dix, Deutsche Bank.

Good afternoon, gentleman. Two questions. I guess just looking to the third and the fourth quarter if you can, how much of your advertising is subject to a cancellation option? It looks like some of it has probably already rolled through and is no longer subject to that. But, if you could give us some idea of that. And then when it comes to M&A, how important is the ability to integrate an acquired property into your network technology when you look at it? Is that something we're going to probably see with the acquisitions you have done so far?

I think that as we have I think demonstrated the integration of Century and the integration of Cinemark and even AMC before that, that we can roll these circuits in pretty quickly and pretty efficiently. Our network is obviously very leverageable. We will have to add a few people here and there in the network operations and scheduling area and so on. Clearly, the local business requires a little bit more attention as the business gets bigger than the national. But I think, clearly, there's an awful lot of built-in leverage associated with bringing these guys in, and I think we can do it pretty quickly. Some of it just has to do with the timing. We will probably be delayed a little bit in the deployment effort in December as we always are every year just because that's when business picks up for the theater operators. So we'll probably try to get into the Kerasotes theaters as soon as we can. We're just finishing up the Goodrich deployment. So we would try to roll from that right into the next deployment. And as Gary indicated, some of the capital for that will be this year and I guess a little bit more than half of it will be next year. What was the first question, James, I'm sorry?

Kurt, just following up on that, I also was curious about your acquisitions of different platforms, like IdeaCast. I know you're not integrating that now, but I'm just curious. As you move into non-theater platforms, how important is integrating that into your technology? And then the second question was, how much of your third quarter and fourth quarter revenue is subject to these cancellation options that you mentioned?

Clearly, there is a plan that we're working on to integrate certain aspects of the IdeaCast technology into our technology and certain operations that we could do from here. We haven't completely gotten through that study. Their technology is more of a broadcast technology, ours is a storm forward. We're also looking at taking our technology and sort of melding it, if you will, with theirs to provide some more capabilities into the health club along the lines of the capabilities that we have in the theaters. So I think, clearly, there is a lot of potential benefit for there for both us and them.

On the sales side as I mentioned, we have two very distinct sales forces that will continue to focus on both the theater platforms in the case of the NCM sales force and obviously the IdeaCast sales force will focus on the health clubs. Clearly, we will make decisions about integrating -- either integrating and/or cross-selling and bundling those things as the market dictates it. Clearly, we believe that over the long-term, digital advertising will be sold across several different platforms and it has always been our thinking in our investment strategy that if we had some of these other platforms, it would provide a very unique product that we could premium price if you will in the marketplace. So I think that's a little bit away, though, I just don't think the media market buying community is there yet and I don't think -- I think there's still some silos, if you will, or pockets of money that are specifically allocated to certain places and it's going to probably be that way for awhile. I really do believe in focus, and one of the reasons we did and the way we did it was so that Cliff and all his guys could continue to focus on selling the theater platform because we still have some work there to do.

As far as your question on the cancellation, as we indicated that some of these contracts have 90 to 120 days. I cannot give you a number of what the -- what the breakout is on contracts that have or have not got cancellation. I can tell you, the content partner deals by definition subject to some make-good requirements are pretty well firm for the rest of the year just because those are annual commitment they make to us, so that is obviously some good news.

Gordon Hodge, Thomas Weisel Partners.

Good afternoon, just a couple of questions. One, I'm not sure, Gary, if I just missed it as you were going through a lot of the data, but I'm curious about the local regional sellout and then what -- I know it's not a CPM-based business, but is there any trend in pricing there? And then maybe you could also comment on, I think the sense was that the local regional guys had a lot -- there was a lot of excitement around the number of blockbusters coming out in Q2. I'm wondering if you're seeing similar excitement as it relates to Q3. And then the other question I had was, congratulations on the Kerasotes. I'm curious, I know you did a Fathom deal I guess it was with National Amusements. I'm just wondering, are the conversations with National Amusements extending beyond or likely to potentially extend beyond just the entertainment side? Thanks.

I guess on the first question, local regional did perform very well. There was a lot of buzz around these tentpole movies, and that always helps them. It was a significant increase over last year, because if you look at last year, you didn't have the Century screen there. You also had Cinemark had been brought on, but sort of had not been fully brought on from a local standpoint and there was still a lot of churn as people that were used to being further up on the show got pushed back. So the '06 numbers were probably a little bit lower. So that's why you had almost a 50% increase. There was a lot of positive things going on. And looking into, it's still pacing very well. You have Harry Potter and a few other big films. But I wouldn't say it has quite the buzz of the Q2, but things are still going very well local.

We just finished our regional sales meeting here the last three days in Denver, and I will tell you, the quality of person that we are getting into our sales group, we have over 130 people or so now, just seems to be improving. And obviously, I think we're doing a better job of weeding out the under performers as I said before. But I think, clearly, the tentpole films helped, they create excitement and momentum in the marketplace. But I think we're just getting a better crop of people. We also have -- we're pretty fully staffed now, so we're getting better coverage in the individual markets. So I think all of that is contributing. And the fact that we're pretty much on our target already for the third quarter, that is clearly quicker than we have done in the past. So I take that as a very positive thing for the local business. I think also, clients in individual markets are also getting used their placement within the show. It's just becoming the standard now, so that is helping as well.

Your question on National Amusements, clearly it would be better if you asked [Sherry] that question. Clearly, they were very excited about coming on board for the Fathom events. Clearly, it's a very good thing for the circuits. And on that, I will tell you that I think the thought process that a lot of network affiliates are going through now are not just geared towards how much money will somebody pay me, and they are now being geared as much towards some of the other intangible things about the quality of the pre-show, how much money can they make on the alternative content, all of that kind of stuff. Where I would tell you a year ago, network affiliates' primary and almost only focus was, what is the guarantee? And I think now, they are willing to may be give up some of that guarantee for further upside and they're seeing obviously our numbers, they're understanding the CPMs a little bit better and all of that. Ad they're also I think liking the pre-show and other things that we're doing and the alternative content stuff. So I don't know whether this will lead to something greater with National Amusements. You ought to ask Sherry.

Last question, the content deals that you have, my understanding is those are higher CPMs. So the fact that it shifted out of Q2 into Q3, could one explain why your CPMs were a little lower in Q2 and why they might be a little higher in the back half of the year?

Yes. Clearly, you have to look at individual contracts to say one higher or lower. There are aspects of the content partner deals that, where they have access to a lot of inventory, they have access to the content partner, the 2.5 minutes of content partner and so on and so forth. So however you want to calculate CPM, that's up to you. We obviously don't report -- there is no money, if you will, or revenue associated with the content partner, the content segments. So it's not an apples-to-apples comparison by any means. In the way we treat them, obviously you could make that assumption but it just goes contract to contract. We do an awful lot of contracts that are much more expensive than our content partner deals.

Barton Crockett, JP Morgan.

I first wanted to just get back to this delay in the recognition of some of this content partner revenue. Could you give us a sense of, if this had come in as you would have normally expected in the quarter, what would your utilization have looked like? And would that have had any impact on the CPM? That's the first question.

The answer I think, Barton, is that, in both cases, they would've gone up. It's very difficult for us to say what effect they would have had on the CPM just because every deal is different. So you would have to make a decision about which content partner moved their money in and so on and so forth. So it's a little hard to evaluate that. I think what we have tried to do in our comments is give you some indication of what third and fourth quarter are going to look like without obviously telling you that. We've indicated how much of our target we have achieved and so on and so forth. So it's a little bit hard because there's too many assumptions you would have to make before you could come up with an answer.

But when you say go up, you mean higher than it was or up year to year?

Again, it would depend. Which ones you want -- it could be yes to both of those, it just depends on which contracts you assume you move back from third quarter to first quarter.

Okay, I will leave that there. In terms of another question, on the audience, it looks like for your member attendance per member screen, it was down about 6%,which seems to echo some of the numbers we've seen out if AMC and Regal so far. And I was just wondering how that varied versus what you were selling? I would have assumed you would have been selling something that would have been presuming a higher year-to-year growth in audience. And explain the level of make-goods that you had and how many you were able to -- obviously, you gave us the end of the quarter make-good number, but how much did you generate and how much did you actually fulfill within the quarter?

Clearly, April and June in particular probably came in a little bit lower than we had anticipated. As we've indicated in past calls, we always want to make sure that we don't undersell the number of impressions. So there are a quarter here and there or a month here and there that we get a little more aggressive. The opposite could maybe be said about May. So on balance, we were a little overly aggressive as was indicated by the fact we had a make-good. But, again, on the balance of our revenue, I mean a 1.7 million make-good is not a big number. I can't remember the make-good balance we had going into second quarter. It was about 2. --.

No, no, it was 1 --.

No, going into second quarter.

It was lower. It went up slightly. Coming out of the end of the year, it was 2. --.

Yes, coming out of the end of the year, that's right. We have drawn it down through the six months.

So it sounds like to the extent you generated some make-good in like April, you were able to maybe satisfy it in June or something like that?

No. In April, we were probably satisfying some of the ones that carried over from the previous month. In some cases, we'll forward deliver, but that is a little tricky as well.

One final question here. Looking a little bit bigger picture, the theater circuits are really about to ramp up it seems like the digital projector rollout. One I think opportunity that creates is for someone to be the satellite vehicle for delivering movies to theaters. And I was just wondering if you could comment on your potential interest in pursuing that business and whether you think it's interesting or something that you might be in a position to obtain.

It's clearly something that we could do because we're doing it now, but as was announced by the DCIP Group, there is another joint venture that will be looking at distributing films that's out there. DCIP happens to be a partner in that, and some of the studios are also a partner in that. It will really depend on what the structure of it looks like. It could be that what we do is, we actually use bandwidth that that entity has, and it lowers our bandwidth cost because now we have accumulated or aggregated the bandwidth usage for advertising with the bandwidth usage for film. So instead of us doing it, maybe some other entity is actually doing it, but we're taking advantage of riding on that network. And then, what we're managing is, rather than managing bandwidth, we're just managing scheduling and all of the other [knock] things that we do today that aren't associated with managing bandwidth. As you probably know, I think that is one of the bigger lever points in that whole model, is the usage of bandwidth.

Okay, great. I will leave it there. Thanks a lot.

(OPERATOR INSTRUCTIONS). Hunter Dubose, Morgan Stanley.

Thanks guys. You mentioned in your prepared remarks that you had walked away from a couple of advertising contracts during the quarter because they would have otherwise compromised your rate card. Can you comment, is that a reflection of some of the ongoing price competition you're seeing with Screenvision that you commented on earlier? And if so, do have any update on when we might see any kind of resolution on that competitive dynamic?

I guess that was a polite way of asking the consolidation question, wasn't it? Clearly, Screenvision is the only other national seller of advertising out there. So there were a few contracts that we just felt got a little bit ridiculous from the standpoint of their effective CPM, so we just walked. Again, as Gary indicated, we think it's very important, especially going into phase where we're going to start adding a lot of screens to our network over the next six months to a year with the addition of Goodrich and Kerasotes and then Loews next June, the last thing in the world we want to do is compromise our rate card. You never want to do that when your network is getting stronger. So I think that's the good question, the answer to the first part of your question.

The answer to second part of your question is that we're interested in looking at any transaction that's accretive for the Company. So that's about all I can really say or want to say about that.

Laraine Mancini, Merrill Lynch.

What we've seen across the broadcast and outdoor industry this quarter is that there have been pockets of regional issues in revenue growth, mostly where there is a tight or a weak real estate market or finance market. Have you seen anything like that, or has the theater business been particularly resilient in the local market?

Well, as illustrated by our numbers, Laraine, I think we have really seen some resilience, and one of the places that we're starting to see a lot of progress is in our regional sales. And when I say regional, it's where we're selling a complete DMA. We actually had one deal that will happen later this year where we had 27 of our local salespeople participated in it by giving up some of their inventory. It was a multi-state, multi-DMA deal obviously. So I don't know whether that means that we're gaining some traction against newspapers and spot television and radio, but clearly, we are starting to gain some traction on this whole regional strategy that we have been employing, which I see as good news. I cannot tell you what the reasons are, there just isn't enough data yet. But it's obviously good news from a momentum standpoint.

That does conclude our question and answer session. I'd like to turn it back over to management for closing remarks.

Thank you, guys, and thanks very much for everyone's support. It has obviously been a bit of a volatile market, to say the least, over the last couple of weeks. And we will continue to work with everyone to the extent that we can. And if you have any other further questions, I'm sure Gary's going to be around for awhile tonight answering questions. So thank you very much for all of your support and we'll talk to you soon.

Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you for your participation and for using [AZT]. You may now disconnect.