National Cinemedia Inc (NCMI) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the National CineMedia, Incorporated first quarter 2008 earnings conference call. I would now like to turn the conference over to Brad Cohen.

Good afternoon. I would like to remind our listeners that this conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. All statements others than statements of historical facts communicated during this conference call may constitute forward-looking statements. These forward-looking statements involve risks and uncertainties.

Important factors that can cause actual results to differ materially from the company's expectations are disclosed in the Risk Factors contained in the company's filings with the SEC. All forward-looking statements are expressly qualified in their entirety by such factors. Now I'll turn the call over to Kurt Hall, Chief Executive Officer of National CineMedia.

Thanks Brad. Good afternoon, everyone, welcome and thanks for joining us for our First Quarter 2008 conference call. Today I'll be providing you with an overview of first quarter results, as well as our progress against our current year operating targets and key growth strategies for the future. Gary Ferrera, our CFO, will then get into a more detailed discussion of our financial performance for the quarter. And then, as always, we'll open the lines for questions.

As we had expected our total Q1 2008 EBITDA declined, versus pro-forma Q1 2007. While we continued to make progress growing our national CPMs and our local and regional advertising businesses and expanding or Meetings and Events businesses, it did not offset the EBITDA margin impact of lower national inventory utilization and lower beverage revenue. While our Q1 national advertising inventory utilization of 58.7% was down versus the 70.1% in Q1 '07, it was significantly above the 48.5% in Q1 '06.

We had expected a decrease as the national advertising inventory utilization during the 2007 quarter was significantly above plan, with an increase of over 20 percentage points over Q1 '06. This strong 2007 utilization growth was primarily related to a couple of clients who advertised heavily with us ahead of key product launches that did not repeat during the first quarter of 2008.

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

As we continue to develop creative executions that work in the cinema environment, and improve our value proposition, I am confident different that cinema advertising will become increasingly important to clients in these and other under-represented categories. Although our overall national utilization declined, our national CPM increased by 6.7% as we held the line on pricing and passed on certain contracts with unacceptably low CPMs.

Our average dollar commitment per national contract declined during the current quarter versus last year as we sold fewer 60 second and all network units and our content partner first quarter spending allocation declined approximately $3 million, or from 18% to 12% of their annual must-spend commitment. As these are must-spend commitments, we expect this money to be spent later in the year.

We believe that the slight drop in national scatter contract values is a short term phenomenon rather than a developing trend that could be attributable to the general cautiousness in the marketplace, relating to fears about the slowing economy.

This view is supported by the fact we have entered into 2008 and 2009 contracts with over 16 first-time clients in the Auto, Apparel, Credit Card, and Personal Care categories, and have increased commitment levels from several clients for 2008 and 2009 that ran small schedules or tested cinema in 2007.

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

During the current quarter we also continue to make progress on our strategy to strengthen our network reach and market coverage improving our competitive position relative to TV and other national advertising platforms. Effective April 1st, 2008, the 480-screen Hollywood Theater circuit joined our network. This addition, along with Loews, Kerasotes and Goodrich will increase the size of our network beginning in June, to approximately 17,100 screens, and expand our market share in the Top 10 and Top 50 DMA's to an excess of 70% and 65% respectively. As our network grows we have noticed an increase in advertisers who are seeking to create a new or expanded relationship with us. In many cases, booking national multi-flight deals for later in 2008, and even extending into 2009.

In some cases, these first-time clients had in the past committed their budgets exclusively to Screenvision. In addition to our network affiliate growth we will continue to benefit from the new construction and acquisition by our founding member circuits. While this net screen and attendance growth will require us to make additional equity issuances, it is accretive from a value standpoint as incremental attendees are being added at a much higher EBITDA margin than the company as a whole.

In many respects, it is no different than making an acquisition for equity, where the synergies can be immediately realized. Also, our long term right to have access to these theater additions insures that our network will continue to strengthen and grow. While some older theaters that are being retired at the end of their leases are not included in the calculation, the number of attendees is very low, and in most cases those patrons go to pre-existing theaters in our network.

It is also important to note that we have a very unique business model with virtually no cash asset replacement cost. Our local advertising business had another solid quarter with revenue up 14.3%. The only sign of a weakening economy is that certain clients have been less willing to sign up for annual or multi-month contracts.

Our local business has appeared to be more resilient to the slowing economic conditions than several other traditional local mediums. While some of this may be because we have not relied as heavily on Real Estate related clients, it may also relate to the ability of our clients to buy theaters only within their specific trade area, thus providing a more effective buy while lowering the out-of-pocket costs compared to other advertising platforms. Cinema is currently one of the only advertising mediums that can provide local and regional geographic targeting for full motion video content.

Our regional business also continued to benefit from the increase in coverage of the larger DMAs, improving our ability to effectively compete on a reach basis with TV, newspapers and radio. Our Meetings & Events business is also benefiting from the continued expansion of our overall network and our live broadcast capabilities with the addition of new founding member theaters and new network affiliates to our advertising network, we now have over 400 live broadcast locations in 145 markets. This expansion has allowed us to attract more high quality programming and build a meaningful 2008 pipeline as content owners benefit from the incremental revenue opportunity and marketing impact created by national release in theaters.

While not expected to provide significant near-term revenue in EBITDA growth, we continue to incubate a couple of future growth opportunities within two of the fastest growing media sectors.

We plan to launch our new Internet site later this year and have recently restructured our Ideacast investment, increasing our current ownership to over 40% with that interest growing to as much as 80% over the next couple of years at an accretive early-stage valuation. As both of these initiatives leverage our existing technology, media production and sales infrastructure, NCM could be very well positioned should media buying silos consolidate around the higher quality digital media platforms, and we are able to offer clients a unique bundle of local and national digital marketing products across several digital platforms. Looking ahead for the reminder of the year, the Q2 TV scatter market has been very sluggish due to either up-front positioning by the networks and media buyers, or the slowing economy, or some combination of both factors. In addition we have passed on several contracts with low CPMs, particularly for the month of May.

While we previously passed on deals with unacceptably low CPMs, the discount and added value elements offered by Screenvision has recently increased, possibly due to the upcoming loss of Loews on June 1. As many of these deals were often with large buying agencies that represent several clients, accepting these deals right at the time when our network was expanding and improving in quality, did not make sense to us.

While building our utilization to create better supply/ demand characteristics continues to be our primary focus, we felt that accepting these low effective CPMs now could create long-term damage to our rate card and our future growth potential. With our 6.7% quarterly increase in CPMs and continued growth in our client base, including several new content partners, we believe this is the right long-term decision, even though it costs us some short term revenue.

With these short term issues with Screenvision and the Q2 scatter market sluggishness, we continue to believe that the 2008 first half revenue and EBITDA comps will be challenging in making up the 2008 first half consensus revenue and EBITDA shortfalls during the second half of the year could prove difficult. Having said this, our booked advertising revenue for the year as a percentage of our annual advertising budget is consistent with where we were at about the same time in 2007.

Thus as we integrate Loews and the other new network affiliates, this larger and higher quality network positions us for strong year-over-year growth in the second half of 2008, and will continue into 2009 and beyond. Now I would like to turn over the presentation to Gary to give you some more details concerning our financial performance.

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

In addition, you should also note that the effect of the Loews's integration agreement is not included in our operating results as those net payments are reported directly to our equity account. The Loews's integration amount was $800,000 for the first quarter of 2008. For the first quarter, our total revenue grew 1% to $62.7 million, from $62.1 million. Advertising revenue declined 3.8% to $53.7 million from $55.8 million, while Meetings & Events revenue increased 45.2% to $9 million from $6.2 million.

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

Adjusted EBITDA, including the Loews's payment for the first quarter was $21.5 million. Adjusted EBITDA margin was 33%, versus 41.4% in the first quarter of 2007, due primarily to a slight change in our revenue mix resulting from the decreases in high margin national and beverage advertising revenue, an increase in the percentage of total attendance contributed by our network affiliates. We were also able to offset some of this revenue mix with the tight cost controls as we delayed certain marketing expenditures and new hires. The decline in total advertising revenue was primarily due to a nearly 12 percentage point decline in national advertising utilization, partially offset by improvement in CPM, and increases in local advertising times sold.

The lower beverage revenue was due to is a slightly lower founding member attendance, and the reduction in Regal's time provided for Coke from 90 to 60 seconds. This decrease was partially offset by the 8% contractual CPM increase for the beverage revenue. As we expect to sell this premium unit at a much higher CPM than the contractual long-term rate, this change provides a future growth opportunity as market demand in our inventory utilization increases.

During several sold out flights in 2007, we bought back inventory from Coke at a favorable spread. Therefore we expect to sell this unit in several flights in the second half of 2008. The advertising revenue mix for the first quarter of 2008 was approximately 60% national advertising revenue, 21% local advertising revenue and 19% beverage agreement revenue, versus 62%, 18%, and 20% respectively in Q1 2007.

National advertising revenue per attendee fell by 12% from $0.25 to $0.22, due to the lower inventory utilization mentioned previously, as well as an increase in attendees due primarily to the addition of new affiliate screens, the majority of which were not digital and fully integrated into our sales process until late in the quarter, and therefore generated lower average revenue per attendee during the quarter. As we have mentioned in the past, our national ad revenue and resulting EBITDA can fluctuate significantly due to one or two contracts.

This is especially true in a low advertising inventory utilization quarter like the first quarter. We were pleased with the growth in our local and regional advertising in the first quarter, which was slightly above where we had budgeted, and up approximately 14.3% over Q1 2007, with local revenue per attendee increasing approximately 9%. This was based off a 9.3% increase in the average number of screens. We entered the quarter with approximately $4 million of make-goods, and as of the end of the first quarter, we had approximately $1.9 million of make-goods, compared to $1.2 million at the end of the first quarter of 2007.

January and February attendance was strong, allowing us to make good much of the year-end balance, however approximately $1.1 million of the balance was requested by our clients to be made good in quarters beyond Q1, and an additional $800,000 in make-goods were generated in March, due to the lower than projected attendance in that month.

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

Our quarterly Fathom revenue increased nearly 80% with the continuing success of the Metropolitan Opera, and the surprise hit the 'Spirit of the Marathon' events. Met attendance increased 71% over the comparable Q1 period last year, and the Spirit of the Marathon event had ticket ticket sales approaching $1 million for two events. With the success of this programming, it is now being shown in additional cities in advance of their summer marathon races. While our CineMeetings revenue continues to be volatile quarter to quarter, due to the number and size of events scheduled, it had a solid first quarter with revenue growth of 12.5%.

Our changes in sales personnel and more focused marketing and sales tactics appear to be paying off. We continue to make great progress expanding our network. As of March 27th, 2008, we had 15,419 total screens in our network, of which approximately 88% were connected to our digital network, versus 87% in the first quarter of last year. These digital screens generate approximately over 90% of our total attendance. Our screen count now includes 2,208 network affiliate screens, not including the 480 Hollywood Theater screens that joined our network on April 1st, and should be fully deployed if the third quarter.

Pro forma for all of our announced network screen additions and the addition of approximately 1200 Loews's screens in June 2008, we will have approximately 17,100 screens and approximately 725 million attendees. In the second half of the year, we estimate our network affiliate attendance will approximate 12% of our total attendance. As we have noted in the past, revenue per attendee and EBITA margins in affiliate theaters are lower than that from our founding member theaters.

On April 14th, we disclosed the details behind the results of the annual common unit adjustment per our agreements with our three founding member theater circuits in an 8-K. The overall result was the issuance of 2.5 million additional common membership units based on an overall net increase in attendance of approximately 13 million. This resulted in a slight reduction of the NCM Inc. equity stake in NCM LLC from 44.8% to 43.6%. As mentioned previously, we continue to believe that this agreement provides a long term accretive growth opportunity. In addition to this adjustment, we have also recently received a notice from Regal that they have completed the 400 screen Consolidated Theaters acquisition. Consolidated attendance is greater than the 2% of our total attendance. Therefore this acquisition will result in an extraordinary attendance increase as defined in the common unit adjustment agreement.

The advertising for these screens is currently being sold by Screenvision, but Regal has elected to receive additional units and pay us exclusivity runout payments until the end of the Screenvision contract, similar to the way that AMC paid us for Loews. We expect to disclose more detail in the next few weeks. Our capital expenditures for the first quarter were $5.3 million versus $1.7 million in Q1 2007. These increase was primarily due to the digital deployment of Kerasotes and Colorado cinemas, as well as some costs associated with our internet initiative.

We estimate that 2008 CapEx will be in the range of $17 to $18 million. Much of the CapEx is related to network affiliate expansion, and to a lesser extent from our internet initiative and software systems development and upgrade. This estimate does include the expected capital for Hollywood Theaters network expansion, but does not take into account any other potential network affiliate agreements we might enter into in the future. Regarding our balance sheet, our total debt outstanding as of March 27, 2008 was $774 million comprised of $725 million term loan and $49 million revolver.

The revolver balance in the NCM LLC cash and cash eguivalent EBITDA was approximately $41.5 million. The interest rate on our 725 million term loan was approximately 6.8% for the Q1 period, while the interest rate on revolver borrowings was 6.1%. Our effective total cash interest rate was 6.7% for the quarter. Our pro forma leverage as of March 27th, 2008, is approximately 4.1 times trailing fourth quarter pro forma adjusted EBITDA, including the Loews payments.

While we do not anticipate paying down our term debt, we expect to continue to deliver over time through EBITDA growth and do not envision dropping to a leverage ratio of much less than three times before re-evaluating our capital structure. We also announced our quarterly dividend payment of $0.15 per share, which is consistent with previous quarters. This dividend represents an annual yield of approximately 3%, based on the current trading levels of our stock.

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

(OPERATOR INSTRUCTIONS.) We'll go first to Hunter Dubose with Morgan Stanley.

Hi, guys, thanks for taking the question. The first one is, you guys absorbed a fair number of the Kerasotes screens toward the end of last quarter. And you didn't really touch on this in your prepared remarks, but is there any sense in which getting the sales force up to speed with those screens tended to hold back utilizations for this quarter, and if so is that likely to reverse itself for the second quarter in which case we might a bumped utilization all else being equal on that matter?

And then the next question I have, is there any indication right now what the consolidated theaters run out payments are likely to look like in terms of size and magnitude? Thanks.

I'll take the first one. We did mention it was kind of hidden in Gary's comments that, we added the Kerasotes and Colorado cinemas during the quarter, and we didn't integrate it fully into the sales force until later in the quarter, so I think your thought is correct that the utilization per screen, per attendee, however you want to look at it, for those theaters was lower.

It's the same delay we have pretty much every first quarter when add new theaters to our network.

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

Formulaicly, is there any reason to believe that it's going to be calculated differently than the Loews run out payment was calculated?

No, not in any material way.

Okay. Thank you.

Thank you. We'll go next to Scott Barry with Credit Suisse.

Hi, Kurt. Just a question on the affiliate ads. You've consistently surprised on the upside since going public. Could you talk about of the value proposition there, and what components of that value proposition are resonating with affiliates?

Sure. From our standpoint in getting affiliates on board, I think a lot of them have looked very carefully at the programming and it's put on the screen, and clearly that's been one of the biggest issues that people have had, and obviously positive view on us. I think the FirstLook has established itself as sort of a bench mark, if you will, of high quality pre-show programming.

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

I think, you know, Gary mentioned in his remarks the fact we could deliver different kinds of programs, whether it's the Met or some other types of programming is becoming more and more important factor as it's putting additional butts in seats during slow movie-going time periods. Those three factors are the biggest factors that affiliates are looking at. I think from our standpoint, the value proposition is pretty clear.

While the margins are low, associated with these incremental attendees, it's incremental, and the returns on investment are very, very high and I think from just a pure cash flow growth standpoint, it provides a great growth opportunity for us. I think there's also an intangible on making our network larger and larger and the coverage greater, the reach greater, allowing us to compete more effectively against the cable networks and the other TV broadcast networks that we're competing against.

Clearly, reach and coverage has always been an issue with cinema, and I think we are fixing that problem, and then obviously we continue to increase our strength relative to Screenvision, which is not a bad thing either.

Great, and the Loews payment looked a little light. Is there anything going on at that circuit in particular prior to the runout?

No, I think it's just the calculation. The way the calculation works, it just focuses on things that we're not allowed to get access to in Loews, which is primarily is onscreen advertising, so I don't think it was any lighter than it was last year, and actually I think relative to the amount of onscreen revenue that we produced this quarter versus last years, it's pretty much right in line.

Great. Gary, if you could just comment and give us some color on the bump-up in admin expenses and maybe sales and marketing as well, what component of that is fixed to drive the growth going forward?

Well, admin expenses just obviously continuing as a public company, that's going to generate some of that, because we have only been public for a year new, so that's been building up. Sales expenses will go up if regional/ local revenue goes up.

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

So you feel like you've got the right people in place to drive the business going forward?

Yes, clearly as Gary said, the place we've been building resources has been in our corporate -- trying to keep up with all of the SEC requirements and so on, and from the time we went public, we've added two or three key people to that mix, and I think we're at a point now where we're pretty stable.

Clear, you know, the amount of accounting people and things like that will continue to go up as the number of screens go up, but they're reasonably low cost individuals.

Great. Thanks, guys.

We'll go next to Rich Greenfield with Pali Capital.

Hey guys it's Arie Davis for Rich. Thanks for taking the call. Two questions, actually. First on the TV scatter market and Q2, we're a little surprised about the trends that you're seeing, given that most major media companies have been reporting pretty strong scatter trends in Q2, so can you talk more specifically about what it is you guys are seeing in the scatter market that is different from the major networks --

I don't think we're seeing anything significantly different. As I mentioned in my comments, there were a number of contracts that came into the market in the second quarter, primarily in May, as I mentioned, that we just chose to pass on, and the numbers just started to get ridiculous after you took into account the CPM, plus all the added value that was being offered by Screenvision. And I don't know whether it was because Screenvision dumping inventory in anticipation of losing Loews, or whether they had issues themselves with their own utilization, but the one thing I know for sure is if we were going to take these dials, many or most of which were from big buying agencies, we were going to get stuck with some pretty low CPMs for the future.

And it just didn't seem to make sense to us, especially what we have in front of us with Loews joining in third and fourth quarter, and next year, so some of the revenue that you're seeing, we've made a conscious decision we're just not going to dive on CPMs, and we're willing to be flexible, but the quality of our network we believe is just so much stronger than Screenvision, if people want to go after the lowest pricing for the lowest quality network, go for it. We're just not going to go there.

Thanks. And secondly, on the Regal Coke inventory, it sounds like it's more like a back half of '08 time frame, or maybe later in terms of being able to monetize that inventory. Can you talk about what's at play there in terms of being able to monetize that? The question stems from the fact I'm wondering why it's not something that would be, given the fact it's beach front property inventory, why it's not something that could be monetized in the near term, perhaps even during the summer when utilization should be higher.

Look, we could monetize it every month, but it's just taking away another 30 second unit that we would have sold, so really all it is is an increase in the Regal circuit from 11 30-second units to 12.

And so you can say we've sold it every month, but all you're doing is taking money out of one pocket, being another 30 second ad somewhere in segment one or two we've sold, and moving it into that premiere space. I think really incremental revenue is only created when you've sold out of the existing 11 30 second unit, and so we did that several times last year, primarily in the third and fourth quarters. The months are pretty obvious, very high utilization in July, August, very high utilization in November and December.

So I think Gary's comment moved everybody in that direction. Clearly, as we start to sell out, that beach front property, as you called is going to be much more valuable than the rate that we were contracted to sell to it Regal and the same as the other founding member. So we see it as an opportunity,clearly it's obviously creating a little bit of a revenue and EBITDA issue right now, because it's a hundred percent EBITDA. There are no costs associated with it.

So every dollar of revenue loss is also a dollar of EBITDA loss, so obviously it's one of the factors that affected our first quarter. I suspect it will affect our second quarter as well, and we're hoping as we get into third and fourth quarter we start to sell it.

Okay. Thanks.

We'll go next to Eric Handler with Lehman Brothers.

Hi, thanks. Hopefully we can talk a little bit more about your strong CPM growth that you saw in the first quarter. It was a little surprising to me given that you had a good amount of excess inventory, your content partners advertised less, and you also had a bunch of new major national advertisers come into the fold.

Was there anything unusual there that allowed you to show nearly 7% CPM growth?

The only thing, and I mentioned it, is we didn't have as many 60 second all network buys, so when we sell a 60 second unit, it's usually at a lower CPM than a 30 second unit, because we will generally discount the second 30 on some basis. So the average of the two 30's is somewhat less. So that could be a little of it, because we did have some very significant 60 second buys last year, and that was what my comment was to. So that would be part of it. I will also just tell you that what we found is that it was sort of binary, that you were going to get someone that understood the value of our network and cinema, and they bought us as at a really good CPM, or they just wanted to get the lowest possible CPM they could get Screenvision to agree to, and they went with Screenvision.

And the difference is as much as $10 to $15 per thousand on some of the contracts that we saw and that we passed on. So there was quite a few clients that just when into the market and played the game between us and Screenvision, and there was a pint at which we just said good-bye. We're not quite sure where Screenvision agreed to things, but we're pretty confident, based on where we said good-bye at, so obviously we made a conscious decision that our threshold had been broken on the CPM, and that we weren't going to go there. I don't know what else to tell you, other than our sales guys did a good job, but that obviously sounds reasonably self-serving.

And then secondly, When we think about your adjusted EBITDA margin, for the year given the increasing proportion of affiliate revenue, can you give some directional feed back, I assume your adjusted EBITDA margin would be less than where you ended last year?

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

So I think clearly the thing that I saw when we looked at the first quarter and compared it to the consensus numbers out there, it was clear to me that the biggest disconnect was margins, and it really related to revenue mix. And I think that it's very difficult in a low revenue quarter, such as first quarter, to pinpoint what the margin effect is going to be of losing one or two national contracts, and in our case losing the Coca-Cola revenue. And I think those margin impacts were much more significant than the Street obviously estimated, because the revenue numbers weren't all that far off.

Clearly there was more CineMeetings & Events revenue than national revenue, and that revenue mix shift right there alone will cause quite a few points of margin decline. So I think the challenge, and we highlighted this, and we've been highlighting it in some of our presentations over the last few quarters, it is the hardest thing to zero in on. the quarter to quarter effects of revenue mix and shifting utilization on our margins.

And as you can see, you know, first quarter is even more pronounced just because it's a lower revenue period. We have an awful lot of our operating leverage in one 30 second ad on a national sell, because almost 100% of that falls to the bottom line. So I think that's the thing that we have to continue to fine tune with the Street, and I think on an annual basis, it's not quite as big an issue, because it seems to sort of filter through the quarters, and on an annual basis, it seems to work out.

Having said that, as I indicated at the beginning of this comment, we will have an increasing affiliate effect, which will bring it down a little bit, and we will have, the Coke unit not being sold a hundred percent of the time, bringing it down a little bit.

Okay. Thank you.

Thank you. We'll go next to Barton Crockett with J.P. Morgan.

Great, thanks for taking the question. Kurt and Gary, I wanted to go back to one thing you guys were saying at the last last earnings call, you had expressed a degree of comfort with what had been the consensus at that time of EBITDA of $206 to $207 million for the year. You were saying that the first quarter would be loser to the '06 percent of the total, which is about 9%. If you take what you guys have actually reported, around $21 million or so, do you still have comfort with what you were saying before or is that now not the case?

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

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

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

Okay. All righty. So it sounds like that's a bit of a modification of what we heard before, which is fine. The other thing I was wondering about is as we look into the second quarter, where you talked about the utilization rates in May and April.

Overall, in aggregate, for the quarter, do you have a view on utilization whether it should be up or down versus a year ago? At this point, it sounds like, it looks like it's down a bit.

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

Okay. All righty. That's great. I'll leave it there. Thanks a lot.

Thanks.

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

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

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

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

Yes, it is a high volume week (inaudible) you're right, it is a fairly big number (inaudible).

(inaudible) but as far as selling it, it doesn't change at all the way your business operates?

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

Great. Thank you.

Yes.

Thank you. We'll now go to Rich Greenfield with Pali Capital.

I'm just trying to ask a follow-up. There seems to be a lot of confusion out there in the marketplace, just investors trying to understand, the level of visibility that you all have, you've made the comment that one contract can swing a quarter.

The other thing, though, seems like there's more and more advertisers interested in advertising on the cinema platform, you have a lot of new categories. Just trying to connect the disconnect here of, it sounds like more people want to use this platform, but it seems like visibility is increasingly challenging at a time when it sounds like a lot of the media industry is talking up how great the national television scatter market is. Looking into the next several months, and you're saying it's soft and passing on contracts, I'mjust trying to tie all the data points together. Any help would be great.

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

So that alone can get you to your first quarter numbers, but we also had a contract or two in the first quarter we passed on, and other contracts.

The thing that you have to understand about, and we also did in May, the thing you have to under standard about television, I have never heard of a television guy passing on a contract, because they've got so much inventory and so many day parts that they can fit certain levels of CPMs into, in their overall budgets process, we have obviously a more limited amount of inventory, and so we have to be a lot more selective in what CPMs that we accept. And we felt pretty good about the decisions that we were making, because as far as I was concerned, we're running this company for the long term, and not just trying to make quarter to quarter numbers.

We could have come a lot further in first quarter and a lot further in second quarter by accepting all of these contracts on a pure revenue base, but we sure would have set ourselves up for a lot of problems going forward from a CPM growth standpoint. And if you look at what this company is really all about over the next two to three to four years, it's about filling out the utilization over the next two to three years, but doing it in a way that doesn't kill our growth potential in that year three, four, five when CPM becomes one of the more primary growth drivers, and so that's the story for us right now in the first half, is there was money out there, we just chose not a to take it, quite honestly --.

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

If you listened to my comments what I was trying to get across, and maybe I was a little too subtle, and I'll be less subtle now, is what we're seeing is a lot of clients are now starting to get the message that Loews is no longer in Screenvision on June 1, and Screenvision will have this runout period which caused some of the issues that you're talking about, and a lot of you alluded to that being an issue potentially. I was hopeful that Screenvision would take a longer term view of the world. They apparently haven't.

But we are very comfortable, given what we're seeing, because we're starting to see very large buying clients, buying us throughout this year, the end of this year, and even committing to 2009. that is something at this time last year we really didn't see. People were making much more short-term commitments, you know, one flight at a time.

If you got two flights, you were really lucky, and we've had some real wins recently, in the last two or three weeks, on clients that have bought multiple flights in '08 and in '09. And we even had one client that had exclusively bought from Screenvision that took their buy later this year and split it between us and Screenvision. To me those are all signs that we're starting to see what we want to see once the Loews and these other guys start joining.

And just to clarify, one last question. When Screenvision no longer has Loews, will Screenvision still be a problem in how much risk do they continue to just drop price and hurt business for you?

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

Denver happens to be one of those markets. So I think what you have to believe, and what we believe very strongly, is that there is going to be clearly a bifurcation of the money, and there are going to be continuing clients that all they care about is price, and those probably won't be our clients until Screenvision completely goes away, and it may not ever happen, but at the end of the day, we're very confident that the money will start to move our way when the quality of the network is so different. Because the network that Screenvision is selling up until May 31st, if you look at the numbers and you're not a media buyer that gets below the details, which a lot of them don't, as you well know, it doesn't look that much different, but you start shifting Kerasotes, you start shifting Loews, you start shifting Hollywood over, and it looks significantly different.

And that's what we've been trying to obviously make the market understand. We've got a a big Ad Age thing that's coming out shortly on us, so we'll see, but that's our view. You guys will believe whatever you want to believe, but we have seen a lot of very positive signs on this forward-buying thing. I don't know any other way to sort of position it.

That's really helpful, thanks.

Yes.

Thank you, this concludes today's's question-and-answer session. At this time, I would like to turn the call back over to Mr. Hall for any additional or closing remarks.

Yes, I think we've pretty much covered all the issues, so again, thank you very much. Obviously Gary and I will be available after the call if anybody has any follow-up calls, and thanks for all your support, and we'll talk soon.