National Cinemedia Inc (NCMI) 2007 Q3 法說會逐字稿

And thank you for standing by and welcome to the National CineMedia third quarter 2007 earnings conference call. Today's conference is being recorded. (OPERATOR INSTRUCTIONS.) And now at this time, I'd like to turn the conference over to Nikki Sacks. Please go ahead.

Thank you. Good afternoon. I'd 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 21-E 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.

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

Thanks, Nikki. Good afternoon, everyone. Welcome and thanks for joining us for our third quarter conference call. Today I'll be providing you with a quick overview of National CineMedia's third quarter 2007 operating results, including a discussion of the progress that we are making against some key growth strategies and business development initiatives. Gary Ferrerra, our CFO, will then get into a more detailed discussion of our financial performance for the quarter and year-to-date and then we'll open the line for questions.

Overall, we had a very good third quarter making significant progress in a number of key strategic areas, including expanding our advertising client base and expanding both our advertising and Fathom Live broadcast network. We also benefited from a very strong theatrical box office. In addition, as Gary will describe more later, we have declared our second quarterly dividend of $0.15 per share.

Third quarter pro forma revenue and adjusted EBITDA grew 32.1% and 34.5%, respectively while pro forma earnings per share grew 37.5%. These results were driven primarily by both the addition of new clients and increased national advertising expenditures from existing clients including our content partners and the continued strength of our local advertising business.

As we have mentioned several times, our primary focus has been to first increase underlying advertising market demand and then let favorable supply demand economics drive our CPMs over time. During the third quarter, this strategy worked very well as we were able to increase our national advertising inventory utilization across a much larger impression base to 93.1% compared to 81.6% in the same quarter last year while slightly increasing our CPMs. For the nine months, our national inventory utilization increased 9.8 percentage points to 82.1% while our CPMs have increased 1.7% over the 2006 nine-month period.

During the quarter, we continued to expand our client base in several new categories including QSRs, retail, electronics, package goods, and apparel and increased expenditures from existing clients, most notably the military and video gaming.

As we have previously mentioned, our current focus on increasing inventory utilization will continue to result in quarterly CPM volatility. Over the first nine months of the year, our average monthly CPM has varied by nearly 30% from the lowest month to the highest. As we are already very heavily sold in certain months, including the summer and holiday periods, the key to creating less volatile CPM growth is to broaden our client based so that there is adequate demand throughout the year. Due to a limited amount of advertising units in any flight one or two deals with lower or higher CPMs can significantly skew our average CPM.

You should also note that our CPMs continue to be negatively impacted by Screenvision and the occasional last minute or introductory deal that we might take. While we intend to remain very aggressive and competitive on our CPMs where it makes sense and is consistent with our long-term strategy, we continue to walk away from deals with low CPMs or excessive value-dded elements.

While cinema continues to gain acceptance in the broader media marketplace, we still have some work to do in several large spending categories. In order to promote adoption of cinema as part of media plans, at times we provide introductory pricing and additional value associated with lobby marketing elements and research. Cinema advertising is still a relatively new media category and thus during the testing phase many ad buyers want to minimize their risk and challenge us to prove to them that cinema works. Clearly, given the favorable recall research we have had no problems providing marketing value of cinema.

Our focus over the last few months -- over the last two years -- on under-penetrated clients in categories and providing new clients with incentives to try the new medium has proven highly effective. The concentration of our top three client categories has remained at approximately one-third of our total national advertising revenue during 2006 and the year-to-date 2007, but we have made progress in expanding our client categories.

Our top three client categories in 2006 were import auto, studios, and television while for the first nine months of '07, our top three categories were, again, import auto, telecommunications, and television. Interestingly, studios are no longer even in our top three categories due to the growth of other non-entertainment categories. In fact, we have increased our client base to approximately 34 clients above the $1 million level across 17 categories. While our sales organization has made great progress as reflected in our very high renewal rate, there's still work to do as cinema is still under-represented in a number of significant spending categories, including QSRs, large retailers, packaged goods, domestic auto, and business and financial.

I was also very pleased with the quarterly results of our local and regional advertising business. The Q3 revenue increase of 25.6% over the same quarter in 2006 reflects a couple of factors, including marketing benefits associated with a strong film slate and a strong effort by our local sales team. We have continued to improve the effectiveness of our local sales force as we reallocated personnel to markets that require more coverage and have changed personnel when poor results dictated.

Our ability to attract better sales talent continues to improve with the increased exposure that NCM and cinema advertising in general is receiving in the marketplace. While it's very important that we continue to execute at the sales and marketing level, expanding our digital network and continuing to improve our pre-show are also very important parts of our long-term strategy.

As previously noted during the year, we have made good progress expanding our advertising network through the addition of the 267 Goodrich screens in Q3, and agreement to add 727 Kerasotes screens beginning 2008. In addition, Kerasotes has recently notified Screenvision that they are terminating their advertising relationship with respect to their Colorado Cinema subsidiary as of December 31, 2007 rather than the end of 2010. As such, those 125 screens located in the Denver market will now be joining our network in Q1 2008.

While there will still be the ordinary sales lag with screen additions, you should note that the usual run- out provisions will only affect the 125 Colorado Cinema screens. We have also begun the Loews transition planning as we move towards June 2008 when we intend to start selling and distributing our FirstLook pre-show in the Loews theaters. Once we have completed the Kerasotes and Loews deployment in mid-to-late 2008, our network will include over 16,000 screens and represent approximately 70% and 65% of the theater attendance in the top 10 and top 50 DMAs, respectively. We believe that the addition of Loews and Kerasotes to our network next year combined with continued increases in market demand will help us establish more stable quarter-over-quarter CPM growth.

We continue to discuss network affiliate relationships with several regional theater circuits. However, as we will already be adding nearly 100 million new high-quality impressions with Kerasotes and Loews next year, we are primarily focused on the circuits that will strengthen certain mid-size market positions. Clearly, as our market coverage and overall scale continues to increase, we will be better able to compete with the other large national networks such as television.

As announced earlier this week, we have also expanded our content partner relationships through a new two-year agreement with A&E and the History Channel. This new relationship has diversified our content partner group and provided additional high-quality content and advertising to our FirstLook pre-show. In addition, as certain companies within the A&E/History Channel groups have spent money with Screenvision previously, this new deal will provide market share shift benefits for NCM.

You should note that this deal and similar marketing that we do for TV networks provides benefits to the movie industry. In many respects, there is a symbiotic marketing relationship between TV and theaters. People go to the movies on Friday through Sunday and see ads for TV shows that predominantly air on Monday through Thursday, where they see ads for movies that opening that upcoming weekend. Obviously, TV along with theaters continues to be a significant marketing channel for theatrical films.

Now I would like to discuss our CineMeetings and Fathom business. Our CineMeetings and Fathom business quarterly revenue growth rate declined from previous quarters to 29.2% for the current quarter, with the majority of that growth coming from lower margin meeting-and-a-movie events. As we have mentioned in the past, one of the biggest challenges with these new businesses is developing sufficient reoccurring event flow so that quarterly revenues are not so volatile. Also due to the existing fixed cost structure, the quarterly profitability of these businesses is also highly variable and very much dependent on the mix of meetings, the quality of Fathom content, and most importantly on the number of screens and seats available for each event.

In order to create higher revenue per Fathom event and hopefully attract more high quality content, we have recently begun to expand our live broadcast capabilities within our founding member circuits, as well as various network affiliates. You should note that certain of these Fathom affiliates are not part of our theater advertising network, including several opera houses and other live event centers that have installed the required digital projection and other technology. With the expansion that is currently in progress, we will have approximately 400 locations in 137 markets versus the approximately 115 locations in 73 markets that we have had in the past.

I'd like to switch now to a discussion of our investment in IdeaCast. During the quarter, we increased our investment in IdeaCast by $2 million to the $7 million total we had planned. As we have discussed, IdeaCast is meant to be an incubator of businesses within the emerging out-of-home digital advertising market. IdeaCast's national network within health clubs continues to grow with approximately 730 clubs and another nearly 350 clubs waiting for deployment. We are hopeful that over 1,000 clubs will be on the network by Q1 2008.

As our investment was meant to fund only a portion of the health club expansion, last month IdeaCast completed a $20.7 million five-year bank debt facility that refinanced some short-term borrowing and will also be used for network expansion and other growth initiatives. With the network scale and reach expanding, the IdeaCast sales team has begun to make progress as advertising deals have been finalized and several are at the proposal phase.

As you will recall, we have structured our IdeaCast investment to include an option and an attractive valuation to increase our ownership to up to 50.1%. This structure allows us the flexibility to monitor operational progress in revenue and equity growth, value growth before we invest further and capture the value of our option. We are also looking at several future strategies to create synergies associated with our sales and technology infrastructure. For now, however, IdeaCast operates as a separate entity so that NCM management team can focus exclusively on maximizing the value of our theater network while the IdeaCast management execute their business plan and potentially provide the future acquisition opportunity and growth engine for NCM.

I'd like now to turn over the presentation to Gary.

Thank you, Kurt. I will now spend some time reviewing our third 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 historical 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 third quarter of 2007, total revenue increased 60.8% to $97.6 million. During the quarter, net income was $9.2 million compared to a net loss of $600,000 in the third quarter of 2006. The improvement was due primarily to payments associated with the founding member beverage agreements, significant core revenue growth and lower payments to our founding members.

These benefits were partially offset by higher operating costs and selling and marketing costs associated with the higher revenue generated and a planned increase in administrative costs due to the Company's IPO. Our interest expense also increased related to our new debt facility, and we recorded expense related to our tax sharing agreement, deferred tax expense, and minority interest, all due to the new corporate structure.

As these historical results are not comparable with the period prior to the IPO, the remainder of my discussion will focus on our pro forma pro forma results 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 account. The Loews integration amount was $3.8 million for the third quarter of 2007 and on a pro forma basis is $8 million for the nine months of 2007 and is estimated to be at approximately $11 million to $12 million for the year.

For the third quarter ended September 27, 2007, revenue grew 32.1% to $97.6 million from pro forma revenue of $73.9 million for the comparable quarter last year. Advertising revenue increased 32.5% to $91.3 million from pro forma ad revenue of $68.9 million for the comparable quarter last year.

Advertising revenue per founding member attendee grew 15.7% to $0.59 from $0.51 per founding member attendee. This growth was primarily due to an increase in both national advertising utilization and local advertising time sold, increases in other on-stream, non-inventory based revenue, an increase in [land and] lobby sales, and a 17.9% increase in founding member attendance. The increase in founding member attendance primarily relates to an approximate 9% increase in screens due to the Century acquisition in late 2006 and a favorable film mix.

Advertising revenues for the third quarter of 2007 were made up of approximately 67% national advertising revenue, 18% local advertising revenue, and 15% beverage agreement revenue. National ad revenue excluding beverage grew approximately 39% in Q3 '07 versus Q3 '06. This increase was driven by a significant increase in inventory utilization of our 11 national 30-second units. Inventory utilization grew to 93.1% compared to 81.6% in Q3 2006, while CPMs grew by 0.4% over Q3 2006, reflecting a very strong national television scatter market, as well as a great job by our national sales team to sell all the additional impressions.

As Kurt mentioned, our current focus on increasing inventory utilization will continue to result in quarterly CPM volatility. During the third quarter, the strong demand was somewhat offset by competitive pressures and our decision to take a last-minute September deal and an introductory deal with a quick service restaurant and a draw-down of Q2 make-goods. We entered the quarter with approximately $1.7 million in make-goods and as of the end of the third quarter, we had approximately $830,000.

Year-to-date CPMs are 1.7% above 2006, however, utilization is up significantly from 72.3% to 82.1% in the first nine months of 2007. Our focus on utilization increases versus CPM is consistent with our plan to increase adoption of the CineMedia.

Local and regional advertising had a strong quarter with pro forma growth of approximately 26% over Q3 2006 driven by a strong film slate, a 9.2% increase in the average number of screens in the network, which is primarily due to the addition of Century circuit and improvements within our local and regional sales team.

As of the end of Q3, the deployment of the Goodrich network, 267 screens, was complete, and those screens are now being sold as part of our network. We are now beginning the deployment of the 727-screen Kerasotes network, which we announced last quarter with an anticipated completion by the end of the first quarter of 2008. And we will begin deployment of their 125-screen Colorado Cinema subsidiary in the first quarter of 2008.

Meetings and events revenue grew 29.2% to $6.2 million from Q3 '06 pro forma revenue of $4.8 million due to an increase in the zero-margin concession and film ticket sales related to the meetings-and-a-movie product. CineMeetings events were held in approximately 2,300 locations during the current quarter, with average meeting revenue per location of approximately $2,400. We also distributed Fathom events for approximately 1,000 sites, with average revenue per site of approximately $800.

Total pro forma adjusted EBITDA, excluding the Loews payments, increased 34.5% to $56.5 million from $42 million in the third quarter of 2006. Adjusted EBITDA margin was 57.9%, up from 56.8% during the same period in 2006. Adjusted pro forma EBITDA including the pro forma Loews payment for the quarter and nine months was $60.3 million and $136.9 million, respectively.

Turning briefly to our pro forma expense line items, advertising operating costs as a percentage of advertising revenues remained relatively flat at approximately 3.3%. Meetings and events operating costs increased as a percentage of meetings and events revenues from approximately 31% in Q3 '06 to approximately 69% in Q3 '07 primarily due to an increase in the zero-margin film ticket and concession sales and a shift of marketing costs into the Q3 from prior quarters.

Network costs as a percentage of total revenue declined from 4.7% in Q3 '06 to 3.8% in Q3 '07 reflecting the scalability of our network. Theater access fees declined from 16.5% of advertising revenue in Q3 '06 to 14.6% of advertising revenues in Q3 '07 due to the semi-fixed nature of the costs.

Selling and marketing costs also declined as a percentage of total revenues from 13% in Q3 '06 to 12.8% in Q3 '07 due to the semi-fixed nature of these costs. Administrative expenses also decreased slightly from 5.8% to 5.5% of total revenue. Minority interest expense associated with our founding members' ownership interest after the IPO was $13.2 million for Q3 '07. As a reminder, this amount represents pre-tax 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 amount due to the interest expense related to the tax sharing agreement, which is approximately $2.7 million for the quarter and $11.2 million for the year.

As of September 27, 2007, we had 14,407 total screens in our network of which approximately 88% were connected to our digital network versus 85% at the end of the third quarter of 2006. Our screen count includes 1,269 network affiliate screens or 8.8% of our total screens and does include the Goodrich screens, but does not yet include the Kerasotes screens which will be added in early 2008 or the Loews screens 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. As mentioned in the past, we expect that our incremental network affiliate revenue per attendee will be slightly lower than that of our total advertising averages due to the structural differences versus our founding member contracts such as no beverage revenue and slightly less available inventory.

As mentioned last quarter, our network affiliate incremental EBITDA margins are expected to be approximately 40% to 45%. This is lower than the EBITDA margin generated by our founding members' screens primarily due to the revenue sharing structure versus the theater access fee 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. We expect these investments to provide us with attractive returns on our invested capital while continuing to strengthen our national network. Our year-to-date total CapEx is $8.5 million and we are still expecting full year 2007 CapEx to be in the range of $19 million to $21 million.

Moving on to our balance sheet. Our total debt outstanding as of September 27, 2007 was $768 million. The revolver was at $43 million at quarter end and revolver balance net of NCM LLC cash and cash equivalents as of November 7, 2007 was down to $16 million. Our interest rate on our $725 million term loan was approximately 6.8% for the Q3 period. Our revolver borrowings carry a bit higher interest rate at LIBOR plus 175 basis points. Therefore, our average total cash interest rate for the quarter was approximately 6.9%.

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 $11.2 million of amortization related to the tax sharing agreements discussed previously.

Our pro forma leverage at NCM LLC as of September 27, 2007 is approximately 4.3 times trailing fourth quarter pro former adjusted EBITDA including the Loews payment. While we do not anticipate paying down our term debt, we will continue to deliver over time through EBITDA growth and do not envision dropping to a leverage ratio of less than three times before re-evaluating our capital structure.

We announced our quarterly dividend payment of $0.15 per share payable on December 6, 2007 to holders of record on November 21, 2007. This amount equates to approximately 60% of our Q3 related cash distributions from NCM LLC after reserving for income taxes and tax sharing payments. This dividend represents an annual yield of approximately 2.3% based on the recent trading levels of our stock.

In closing, I would like to make a few comments about the remainder of the year. Consistent with industry and analyst reports, October attendance is down versus last year and our internal estimates. We have expanded our inventory in November and December to absorb potential impression shortfalls generated in October. However, on a positive note, the strong national advertising scatter market has continued into Q4 as we have virtually sold out our national advertising inventory in November and December and have now begun to focus our sales efforts on 2008.

In fact, we had so much demand for inventory in November and December that we acquired inventory from Coke at a small favorable spread to meet that demand. You should also note that Regal has recently notified us that they will only be acquiring 60 seconds of inventory beginning in January of 2008 rather than 90 seconds. While we believe that this 30-second reduction will lead to a very small committed revenue decrease over the first few quarters of 2008, as market demand builds over time, this could provide revenue upside if we are able to sell this premium unit at a higher CPM.

Our local and regional advertising business also continues to perform very well, although there are not as many [potential] film sequels in Q4 to market against. We have also noted some softness in certain local client sectors that are more sensitive to the local economy, most notably real estate agents. Having said this, we are still expecting strong year-over-year revenue growth for the quarter.

While our CineMeetings and Fathom business continue to do well, the 2006 Q4 comps are challenging due to the Q4 2006 event that represented approximately 30% of the CineMeetings revenue for all of 2006. We are hopeful that a number of CineMeetings bookings combined with a significant expansion of the Fathom network and events, including a Garth Brooks concert in November and the 2008 season's first Metropolitan Opera event in December, will provide growth at the EBITDA level.

With all that said, we are comfortable with the current first-call consensus pro forma revenue and adjusted EBITDA estimates for the full year 2007, subject to any make-good adjustments.

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

Very good. (OPERATOR INSTRUCTIONS.) Our first question will come from Eric Handler with Lehman Brothers.

Hi. Thanks a lot. Three questions. First, with Coke, the Coke transition, is that a permanent reduction for them doing -- going to 60 seconds versus the prior 90 seconds? Secondly, A&E, is that an incremental content partner or will they be replacing someone? And then Kerasotes, did they have to provide -- make any payments to Screenvision for canceling the Denver contract or are you free and clear there?

Okay, in order, the Coke contract is expected to be permanent, 60 seconds for Regal. A&E is taking a spot that we basically combined the Universal and NBC spots, that were two previously, into one, so they agreed to combine into one corporate deal, which opened up the space for A&E and History. Kerasotes, both Kerasotes and NCM participated in a termination fee.

That's already been paid or is that going to be something that you pay as you go?

It will be paid as we go or actually paid at year end at the termination of the agreement and it's included in Gary's CapEx assumption.

So, there's no -- there's no income statement impact then? It's all -- the revenue you get from Denver will just go it alone? Okay.

Correct. And as I mentioned, there is a run-out provision related to just the Colorado Cinemas, so obviously, the yield from those screens for 2008 will be less than normal, but still it'll be part of our network.

Great. Thanks.

Yes.

Our next question is from Eileen Furukawa with Citigroup.

Hey. Thanks for taking the question.

You bet.

Can you hear me?

Yes, you bet.

Okay. You know, I just want to get -- you talked a lot about your national ad utilization being significantly up and can you weight it? Was it weighted more towards new customers, more toward existing customers deepening their pocket? Was there increase in sale of inventory in any particular category? Can you just kind of drill down a little bit more why, you know, this huge increase, and also can you give us a sense of what the local utilization was in the quarter compared to the last?

Yes.

And -- oh, go ahead.

Well, the last first because it's the easiest one. We don't actually track our local by utilization. It's more time sold, if you will, because we don't really -- we haven't created a structured amount of inventory and a denominator per se. We're kind of moving in that direction, quite honestly, but we haven't gotten there yet, so that 's why in Gary's comments it was referred to as more time sold. So, that's the answer to that question. Your question on sort of client mix, clearly, and we had indicated this in our last call, there was going to be a higher percentage of content partner money in Q3, which there was. And, so that was part of it.

The second part of it was there was a couple of -- there was one domestic import auto in September that was sort of a late edition. I think Gary had mentioned that, as well, and we had a QSR that came to the plate in third quarter, which was a huge win and we also had a big retailer that it looks like is going to renew in 2008, which was another big win. Those are kind of the new ones. Clearly, you know, you can tell from the mix that I gave you, import autos continues to be a very, very strong client. Telecommunications jumped up a little bit in our listing, so that's obviously moved up. And, you know, television, obviously, in studios continue to be, you know, among our top clients, as well.

Okay, and just a couple of other questions. You talked about your renewal rates being high. What -- you know, can you give us a sense what your renewal rates are and also in these content deals as you strike them, I know they're very different, but what kind of rate increase do you look to try to get in these sort of multi-year contracts?

Yes, it's -- they're two-year contracts, and I'm not going to discuss the rate increase, if you will, but generally they're single-digit rate increases and, you know, we're very happy with them. They're obviously CPMs that we find very attractive, and especially given the two-year commitment, so I'm not going to get into a lot more detail for obvious reasons, competitive reasons mostly. And --.

Renewal rates?

Yes, renewal rates are pretty darn close to 100%. I mean, I can't think of a big client -- clearly, on the local side, you'll have clients come and go and in and out, but on the national side we're pretty close to 100%. And I can't actually think of a major deal where we haven't had them come back the next year and either increase or not. And the one thing I would note, and you may have already noted this, I know some of you go and look at our show, the military has stepped up significantly for the year, especially in the fourth quarter, and so that would be another category I would add as another huge increase. Obviously, the military's been, a long-standing client of us, and this year they've really stepped it up.

Thank you very much.

You bet.

Our next question is from James Dix with Deutsche Bank.

Good afternoon, gentlemen. Couple questions. Just given the very large increase you posted in utilization in the quarter year-over-year, how should we be thinking about utilization for '08, especially given you have some new screens coming on. Any updated thoughts there? And then, Gary, you were pretty detailed in going through various items for the fourth quarter in terms of comparisons. Anything we should be thinking about in terms of -- I think you added an extra unit to your show last year in the fourth quarter. I mean, is that going to create any comparison issues that we should be thinking on the revenue side? And then, I guess, the last one would be any thoughts on the SignStorey acquisition and just kind of how you're rank ordering various digital out-of home opportunities?

Yes. Those are all good questions. Let me start with the last one. The SignStorey, we had looked at the company not in a lot of detail, but obviously, it was one of the companies that we had looked at when we were evaluating the whole space and eventually obviously did the deal with IdeaCast. You know, it wasn't one that we obviously felt given though we made the investment in IdeaCast that we ranked as high as others. You know, as we've said in the past, we set forth a bunch of very specific criteria that we were going to look for in these various investments and IdeaCast we thought met most of them, if not all of them, at a very high level including the fact that a lot of the CapEx is invested by the real estate owner, very fragmented real estate base, if you will, high endemic number of advertisers, you know, good relationship between cost per deploying at, you know, (inaudible) of deployment and CPM, you know, all those sort of things. And that's kind of the way we looked at that whole industry, and as I said, we thought the IdeaCast investment was the right one.

And we really do view health clubs as sort of the -- what I'll call the next level down, if you will, from cinema as far as a god environment to advertise in given the amount of time that you're there, the captivity, especially now with these individual viewing units, the engagement that we have obviously between the advertising medium and the individuals and so on. So, anyway, that's that question.

The comparative issues that you asked about, obviously, if we went out and bought, as Gary had mentioned, some units from Coke, you can pretty much assume that we did expand our inventory in November and December of this year reasonably consistent with last year. So, I don't think there's going to be necessarily any comparative issues. We are -- you will note there are some very long form advertisements primarily for the military, and so, that's something that's a little bit different, but generally, as Gary had mentioned, it's a very -- it's been a very strong, at least, the end of November and December period, fourth quarter.

What was the other? Yesl, the change in screens for next year, it's a good question. Clearly, you know, we said we're going to bring on a 100 million new impressions. You know, we'll start the year with all of the Kerasotes circuit on the network, a little bit of run-out that we'll have to take care of in the Colorado Cinemas part of that because they have that agreement with Screenvision. Clearly, we won't be picking up Loews until June, so there -- it's not a full year, if you will. Most sales efforts will start in June, and that will come on throughout the year, and I think I've been pretty clear that we think the real positive impact of Loews in particular will really hit us near the end of next year and into '09. So we're continuing to see a lot of market activity for '08. We pretty much stopped on a national basis selling '07 right now. We're completely and 100% focused on selling '08. We're getting a lot of inbound calls from clients on, setting up multiple unit deals for next year, sort of up-front looking like deals, if you will, where there's multiple units involved. Over the year we even had one situation where somebody wanted to buy inventory over a couple year period, so the demand seems to be pretty good.

First quarter continues to be challenging from a pure utilization standpoint. As you know, that's our lowest utilization quarter, and that's mostly driven just by the economics, I think more of the advertising business than anything, and there's nothing really new to report on that. We had a very good first quarter last year. So I think that's probably the best update I can give you, James, on that.

Okay. Great. Would you expect utilization to be up next year?

Well, you know --.

Kind of hard to say.

Well, the guidance we've given people in the past is that we think utilization will grow between 200 and 500 basis points a year.

Okay.

And obviously, we're exceeding that this year, which is a good thing. And we'll have to just wait and see for next year. I think I want to stay consistent on our 200 to 500 basis points of guidance.

Sounds good. Thank you.

You bet.

Our next question is from Barton Crockett with J.P. Morgan.

Okay, great. Thank you for taking the question. I wanted to find out if you think there's any potential impact on your business from the writers' strike in two ways. I mean, one, just people's interest in advertising in movie theaters. You know, I doubt anything now, but asking about that. And then secondly, probably more close to the heart is just you have a lot of exposure to TV network advertising. With those guys going into reruns in some of their shows and maybe more as we move into next year, is there any risk on that ad category for you?

Clearly, most of our television advertising comes from our content partners, and I would think, you know, between now Discovery, A&E History, you know, for next year, and NBC, clearly NBC's probably exposed to the most potential risk on that, I guess, because of the scripted nature of their programming versus the programming on those other networks. So, I don't know enough about where all their content comes from and how much writers are involved with Discovery stuff and whether that affects it, but it would just seem to me that Discovery and A&E and History are less tied, if you will, to scripted content. Having said that there could be actually a short-term positive effect on us that if advertisers start to look at some of the shows that they'd ordinarily advertised against and don't want to advertise against reruns, maybe they'd move some of that money. You know, they have the ability to hit their options and their upfront numbers and maybe some of that money flows our way next year. Don't know. Just speculating.

I think from the standpoint of the theatrical films I think,, based on my conversations with the studios, I think most studios feel pretty comfortable with their '08/'09 theatrical release schedules. You know, clearly, if the strike continued for a long, extended period of time I think most of them felt they wouldn't have an impact until '010. You know, having said all of this, if you go back into history, two of the biggest years in the business in their time periods were the end of 1989, I believe, right before a strike that happened then or right after, rather, a strike that happened then. And then if you go to 2002, as you may recall, there was a threatened strike in the period before that, a year or so before that, and a lot of stuff that accelerated into the pipeline and actually 2002 ended up being one of the high marks of attendance in the industry. So there's a lot of conflicting data out there, none of which seems to be all that negative, at least for our business.

Okay. That's helpful. And then in terms of the -- you had mentioned, I think, that there were some competitive issues in the quarter. I was just wondering if you could elaborate --

Sure.

-- on what you saw there and just looking forward how you kind of read the impact on competition, you know, from Loews moving over and what you see happening at Screenvision more generally.

Well, you know, Loews clearly is a very important part of their sales process right now given the top ten market positions. Clearly, when Loews moves over, we increasd 70% or so of attendance in the top ten markets, so all of those factors are very, very important and as I've indicated before, we think the real effect of that given that there's some run out and other things that will take some time will be at the end of '08, into '09. And I think that Loews even though it's only around 1,200 screens, will have a reasonably significant impact on buying decisions with media buyers. So, you know, obviously, we're very excited about that. I think clearly it's been the case for the last several years, so nothing has really changed.

You know, we make the same comment pretty much every quarter that I think pricing -- there's a bit of a drag on pricing in the marketplace for some contracts where both us and Screenvision are bidding for the business. In some cases, we bid and hopefully we get the business. In some cases, we let it go. It really depends on the client, the category, the price, obviously, and a number of other factors, but at the end of the day it's something that we continue to fight through. I think it will be less of an issue when Loews goes away, and we'll just have to wait and see. But, I think our market position -- the strengthening of it, I think, will really be a determining factor.

Okay. And then you had mentioned on the local side some weakness and some, you know, real estate agents, which I guess would make sense, but no idea of the magnitude of your exposure there? I assume it's very small, but I was wondering if you could quantify that for us.

Yes it is. You know, we've obviously been listening in to some of the other conference calls and Lamar, I guess in the second quarter, had cautioned people a little bit on some of their local business, and so we've really spent a lot of time, Gary and I, talking to our local sales force, trying to get some feedback. And, you know, there doesn't seem to be any widespread issues. A few clients have been a little bit more timid about committing for long periods of time. Often we'll do annual contracts for people. I just think there's a little bit of uneasiness, but I wouldn't -- you know, you can tell in our growth rates, business is still incredibly strong. So, you know, I think there's a few categories and it's something that we're continuing to watch very closely just because we keep hearing from other mediums that they're having some issues in their local markets. We're clearly not seeing it to the extent we've heard about other mediums seeing it.

Okay. All right. And then a final question here just on the -- looking at the fourth quarter. I mean, since you basically sold out all of your inventory last year and it looks like you basically sold it all out this year, you know, in order to see kind of meaningful national ad revenue growth, we would either need to see ramp up in the CPM growth rate or obviously we'll see the continued flow through of the additional screens, and I was just wondering if you could give us a sense on the CPM growth, you know, are we going to see that trend line potentially improve here in the fourth quarter versus the third quarter?

Yes. I don't think you're going to see as we've commented,a lot of significant CPM growth sort of quarter to quarter. I think it will be a little lumpy because one contract can actually make a difference. The other thing I will tell you in our current fourth quarter we've done some long form stuff and the way those long form things are priced, you know, you price the first 30 seconds at sort of full rate card, a little bit of a discount on the second 30 seconds, and a little bit more discount on the third 30 seconds and so on. So clearly, there's going to be these ups and downs quarter to quarter, and as I said, until we can get to a point where demand out stripes supply, it's going to be a very, you know, lumpy quarter to quarter stuff. And quite honestly, I don't think it's something that is important to our business strategy right now as it is just getting more and more clients on board and building that demand and making sure that we can sell out every single month because our quarterly numbers that we give you are obviously in the case of fourth quarter has October in there, too. That's going to skew down the quarter numbers while November and December are very high sell-through periods. So, to get the quarterly numbers up, as I mentioned in my comments, you've got to pretty much get the sell-out throughout the year. And that's really been our strategy and we will continue to push on that strategy because I think adoption by a wider variety of clients is the most important thing we can be doing right now.

Okay, great. Thanks a lot.

You bet.

(OPERATOR INSTRUCTIONS.) We'll next to go Lloyd Walmsley with Thomas Weisel Partners.

Hey. Thanks for taking my call. I was just wondering if you could talk about sort of the airplane pricing model and if you've had any progress in building an advertiser or working with an advertiser to fill inventory that you haven't sold on perhaps a lower CPM basis off the shelf.

Yes, I don't have anything, Lloyd, to report, but we are working with several different advertisers on the idea, and there's a couple of different structures actually that we're looking at, but you can assume that, as you've mentioned, that it will be at a lower CPM. But, again, that's just one more example of are you better off to take the lower CPM deal or let the inventory burn at zero. And I think, clearly, until we fill out our inventory, there's going to be this possibility and often we're going to do it where at the last minute we may take a deal. We did it at the end of the third quarter. In fact, going into September, we were two days away from closing the flight and we had money come in and it happened to be from an auto. And we took the money and, you know, it wasn't at a CPM you wanted to write home about, but it was a heck of a lot more than we would've gotten for that piece of inventory had we just let it burn. So, again, it's -- to me, it's all about supply/demand economics and building that demand for the medium.

Great. Thanks.

Yes.

And with that there are no further questions in the queue. I'd like to turn the call to Kurt Hall for any additional or closing comments.

Okay. Well, thanks very much, everyone, for taking the time to join the call and for all of your support, both the analysts and all the investors that are on the line, and obviously, I'm sure the analysts at least or even investors, if they have other questions they want to catch up with Gary or I after the call, please give us a call. Thanks again. We'll talk to you soon.