National Cinemedia Inc (NCMI) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, thank you for joining and welcome to the National CineMedia Incorporated second quarter 2008 earnings conference call. Please note today's conference is being recorded. Following the presentations, we will conduct a question and answer session. (OPERATOR INSTRUCTIONS)

I would now like to turn the conference over to Nikki Sacks with Integrated Corporate Relations. Please go ahead ma'am.

Thank you.

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 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 than 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 will turn the call over to Kurt Hall, CEO of National CineMedia.

Thanks, Nikki. Good afternoon everyone, welcome and thanks for joining us for our second quarter 2008 conference call. Today I will be providing you with a brief overview of our second quarter operating results, and highlights of what we expect for the second half of the year. Gary Ferrera, our Chief Financial Officer, will then get into a more detailed discussion of our financial performance for the quarter, and our specific financial guidance for Q3 and the full year. And then as always, we will open the line for questions.

As we had indicated in our update call at the beginning of June, our Q2 was not a great quarter versus 2007. Our Q2 total revenues increased 3.6% year-over-year, as growth in our Meetings & Events, and local advertising revenue, more than offset a decline in national advertising revenue. However our total Q2 2008 adjusted OIBDA declined versus Q2 2007, due to a change in revenue mix, away from the higher margin national advertising and beverage revenue.

While our Q2 national advertising inventory utilization of 66.2%, was down versus 80.8% in Q2 2007, our national costs per thousand, or CPMs, were up 12.5% in Q2 versus the prior year, reflecting a favorable mix of national contracts, toward clients with less pricing sensitivity, and our focus on maintaining the integrity of our rate card.

Given our relatively weak Q2 national advertising performance, we have taken a hard look at the underlying Q2 national scatter marketplace. The main issue appears to be that the softer scatter market resulted in a decrease in the volume and size of deals in the marketplace. Also some of the money that was in the scatter marketplace was beverage related, carried lower CPMs, or was inappropriate for cinema, including certain pharmaceutical brands, high end business products, and some political ads.

In addition, direct response ads were used by TV as an inventory filler. Direct response ads were generally not going to be appropriate for cinema. While our decision not to pursue certain deals obviously contributed to our lower national inventory utilization, we continue to believe that over the long-term, that it is critical that we produce a high quality pre-show, and maintain the integrity of our rate card, especially during higher theater attendance periods, like May and June. Having said that, we are doing a number of things in order to reduce our exposure to these softer time periods throughout the year.

We have extended and expanded our content partner relationships, and our cell phone courtesy PSA, and are looking on establishing more long-term relationships with new clients that buy media throughout the year. While we will be introducing these new clients to cinema at a lower CPM, it will reduce our reliance on ad buys associated with product launches, and with other event or seasonal marketing priorities.

Over the last few months, we have signed several multi-year deals, including the cell phone courtesy PSA with Sprint announced yesterday, and renewals with long time content partner Sony Pictures and Turner Entertainment. I am also pleased to announce today a new expanded relationship with Disney, including it's ABC Television Network and ABC Family channel. The Sprint deal is a 3 year deal beginning this October, and each of the content partner arrangements will provide increased spending commitments for 2009 and 2010.

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

We have also made progress expanding our client relationships in the scatter market, with recent new client additions in the travel, pharmaceutical, personal care, and entertainment sectors. Through Q3 we have had eight client categories that have grown by more than $2 million, versus the same 9 month period last year. However we have had five categories that have declined by more than $2 million. Categories which have seen the largest growth include domestic auto, cable TV, retailers, electronics, and credit cards. Cable TV, telecommunications, import auto, broadcast TV and movie studios currently are our Top 5 categories. The single largest declining category was packaged foods, as we continue to struggle to establish recurring relationships in this very important spending category.

We also saw decreases in home video, as commitments with certain of our content partner agreements were reallocated to other products and video games, as 2007 deals primarily related to product launches. As you would expect, in most cases, these declining categories were comprised of a limited number of clients, which highlights the importance of expanding our client relationships across all categories. Clearly we cannot rely on direct response or other fill-in advertisers, the way that television can.

We continue to work on the packaged food category. NCM along with Screenvision, has recently agreed to make a minor investment in the upgrade of the media mix playing software of a large agency, to assist with a specific cinema media planning project of one of their multi-brand clients. We are also discussing a so-called airplane deal, with a couple of different clients, who traditionally are more price sensitive, but will allow for placement flexibility throughout the year.

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

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

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

Our Meetings & Events business had another great quarter with year-over-year revenue growth of 70%, reflecting growth both in power CineMeetings and Fathom divisions. In fact, our Fathom revenue doubled, as the expansion of our live broadcast capabilities to over 400 locations, has allowed us to expand the per event revenue potential, and attract more and higher quality content. While the operating margins of these businesses are much lower than our advertising business, the increase in revenue, the operating leverage associated with our national network, and more efficient corporate and event management, has allowed us to increase our Meetings & Events operating margins, after the allocation of all fixed and variable costs.

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

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

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

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

Looking ahead we expect solid national advertising growth in the second half of 2008. While the scatter markets continue to develop later than they have historically, giving us somewhat less visibility into our future national sales pipeline, our Q3 revenue guidance includes only booked deals, as the sales activity for Q3 is winding down. While there are a number of positive factors and market indicators, which leave us confident that we can achieve our projected growth in Q4, the projected revenue amount is not entirely booked yet.

The good news is that with the addition of AMC Loews and the 53rd week, we have more than enough inventory to achieve our projections. We also remain reasonably bullish on the second half theater attendance, as the third quarter is off to a stronger than expected start with the success of Dark Knight, and a robust slate for Q4, including sequels Madagascar, the next James Bond film, and the sixth Harry Potter film.

In addition to providing more impressions for our national team to sell, a strong sequel-based movie slate has historically benefited our local advertising business. We are hopeful that this strong film slate could provide a bit of a hedge for our local ad business, should the economy continue to soften.

As we announced earlier today, we have increased our quarterly dividend by approximately 7%, to $0.16 per common share. This increase is reflective of our strong cumulative free cash flow since our IPO, and our outlook for the second half of this year and beyond. Also a year ago, we made a commitment to review our dividend policy annually, with the intent to distribute a significant portion of the free cash flow received from our operating partnership with the founding member theater circuit.

While the worsening of the economy could adversely affect the advertising business over the near term, existing cash balances at the NCM Inc. level, the higher overall operating margins of our advertising business, and the continued growth of our Meetings & Events business, provide a substantial dividend cushion. Given our corporate structure we felt increasing our regular dividend was the best way to return value to our shareholders, and maintain financial flexibility, as opportunities present themselves, or business conditions change.

While I am disappointed with the lack of growth in the first half of this year, these recent results have not changed our original thesis about the shifts going on in the media business. As such, our business plan remains unchanged. We will continue to focus on expanding the geographic reach and coverage of our digital network, expanding the depth and breadth of our advertising and CineMeetings client base, continue to improve the Fathom programming, and continue to improve the experience for theater patrons. I am confident that if we continue to remain focused on these basic strategic goals, we will deliver attractive revenue and free cash flow growth, and superior returns to our shareholders.

Now I would like to turn over the presentation to Gary, to give you more details concerning our financial guidance.

Thank you. I will now spend some time reviewing our second quarter financial performance in a bit more detail, as well as provide guidance for Q3 and full year 2008.

My discussion on year-to-date information 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 September 30, 2006. In addition, you should also note the effect of the Loews integration agreement is not included in our operating results, as those net payments are recorded directly to our equity accounts.

The AMC Loews integration amount was $3.2 million for the second quarter of 2008, and $4 million for the first half of 2008. Similarly Consolidated Theaters, which Regal acquired on April 30th, is not included in our operating results, as there is an existing contract for onscreen advertising through January 2011. These net payments for May and June were recorded directly against the intangible asset established in conjunction with the issuance of LLC units to Regal telated to the Consolidated circuit acquisition.

For the second quarter of 2008, these payments were approximately $500,000. For the second quarter, total revenue grew 3.6% to $86.7 million. Advertising revenue declined 2.5% to $74.8 million. While Meetings & Events revenue increased 70% to $11.9 million.

This resulted in total Q2 adjusted operating income before depreciation and amortization, or adjusted OIBDA, of $42.8 million, a decline of 8.4% from the prior year. Adjusted OIBDA margin was 49.4%, versus 55.8% in the second quarter of 2007 due to a shift in revenue mix towards our lower margin Meetings & Events business, as well as our lower margin local advertising business. Adjusted OIBDA, including the AMC Loews and Consolidated Theaters payments of $3.7 million for the quarter, was $46.5 million, versus $49.5 million in 2007, a decline of 6.1% from the prior year.

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

The income tax provision for Q2 reflects an adjustment of $800,000, which increased the current quarter tax provision and decreased net income. This had an impact of $0.02 on earnings per share. This adjustment is the cumulative result of applying a lower overall tax rate to deferred tax assets and liabilities, expected to be realized or settled on or after January 1, 2009. This lower tax rate is due to changes in our Colorado state apportionment calculation, as a result of a tax law change enacted in Q2 '08. This should result in our paying a lower tax rate in the state of Colorado in 2009 and beyond.

The decline in total advertising revenue was primarily due to a nearly 15 percentage point decline in national advertising utilization, and a $1.3 million decrease in beverage revenue compared to the prior year, primarily due to a reduction in contracted beverage advertising time by one of our founding members. These declines were partially offset by a 12.5% increase in CPMs, and higher local advertising revenue.

Advertising revenue per attendee fell by 9.4% to $0.48, due primarily to the lower national revenue, combined with a 6.8% increase in attendance. Even with the increase in attendance, local advertising revenue per attendee increased slightly to $0.11. Note that we are now providing ad revenue per attendee based on total attendance, including founding member and affiliate screens, as we feel it is more appropriate, due to the increasing number of affiliate screens in our network.

The advertising mix for the second quarter of 2008 was approximately 64% national advertising revenue, 22% local advertising revenue, and 14% beverage agreement revenue, versus 65%, 20%, and 15% respectively in Q2 2007. We entered the quarter with approximately $1.9 million of make goods, and as of the end of the second quarter we had approximately 1.1 million of make goods, compared to $1.7 million at the end of the second quarter 2007.

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

We continue to see growth in our local advertising in the first quarter, which was up 7.2% over Q2 2007, due primarily to an increase in the total screens in our network. You should note that there is typically a delay, between the time that we add a theater chain, when these new screens are installed with digital equipment, and when we market these new impressions.

Kerasotes was added in December, and was fully installed and available for marketing by the end of the first quarter. While Hollywood and AMC Loews screens are now part of our advertising inventory, the screens will not be fully integrated into our sales process until Q3 for Hollywood and Q4 for AMC Loews.

Our Meetings & Events business also had a solid quarter, as revenue increased to $11.9 million, from $7 million in Q2 '07. As we increased our CineMeetings client base and attracted a number of successful programming events to our Fathom network, our Fathom event count during the quarter this year was double what it was in the second quarter of 2007.

Turning briefly to our expense line items, advertising operating costs increased approximately 220 basis points to 5.1% of advertising revenues, due primarily to the increase in our affiliate network, and the decline in our higher margin national advertising and beverage revenue. Meetings & Events operating costs increased to 61.3% of Meetings & Events revenues, from 55.7% in Q2 '07, primarily due to an increase in revenues attributed to higher quality events, with higher content splits.

In Q2 '07 one of our more successful events, was a marketing event with up-front marketing payment and limited content splits. Network costs increased slightly by approximately 10 basis points to 4.5% of total revenue, due to the increased size of our network. Theater access fees were up 60 basis points to 16.2% of advertising revenue, due to the semi-fixed nature of these costs, along with a modest decline in advertising revenue.

Selling and marketing expense increased approximately 140 basis points to 13.7% of total revenues in Q2 '08 due to a variety of factors, such as the semifixed nature of a national sales force, along with a slight decrease in national advertising sales, as well as an increase in marketing personnel costs, the expansion of our local sales force in-line with the growth of our network, and higher commissions related to higher local advertising, and Meetings & Events revenue. In addition, we increased our bad debt provision reflecting the increased local client base and revenue levels.

Administrative expenses declined to 6.6% of total revenue from 6.9% in Q2 '07, due to lower personnel costs, including a reduction in accrued bonuses, which are based primarily on achievement of OIBDA budgets.

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

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

Our theater network continues to grow. As of June 26, 2008 we had over 17,000 total screens in our network, including 2,771 network affiliate screens. Approximately 14.7% of these screens are digital. On a weighted average basis, our network grew by approximately 12% for the current quarter over last year's similar quarter. Approximately 16% of our network is now composed of affiliate screens, compared to 7% a year ago.

Approximately 86% of the screens were connected to our digital network, versus 87% at the end of the second quarter of last year. However this number will increase as we complete the installation of Hollywood. These digital screens continue to generate over 90% of our attendance.

Our screen count now includes the approximately 1,000 AMC Loews screens, and the 480 Hollywood screens, but not the 400 Consolidated Theater screens that will be included in 2011.

Our capital expenditures for the quarter were $3.7 million, with a total of $9 million in the first half of 2008. We continue to estimate 2008 CapEx will be in the range of $17 million to $18 million for the full year, with the capital expenditures in the second half of 2008 primarily related to adding Hollywood to our digital network, our Internet initiative, and recurring software development and IT costs. As you would expect, we are constantly in dialog with potential new network affiliates, however, this guidance does not take into account, any potential further network affiliate agreements that may be signed during the year.

Regarding our balance sheet, our total debt outstanding as of June 26, 2008 was $772 million, comprised of a $725 million term loan, and a $47 million revolver balance, versus $43 million at the end of Q2 '07, and $59 million at the end of fiscal 2007.

The interest rate on our $725 million term loan was 6.3% for the Q2 period, while the interest rate on our revolver borrowings was 5% for the Q2 period. Our average total cash interest rate, taking into effect our swap agreements on $550 million of the $725 million term loan, was approximately 6.2% for the quarter versus 6.9% in Q2 '07.

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

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

As we indicated on our second quarter update call, I will now provide quarter and annual guidance. For the third quarter of 2008, we expect total revenue of between $103 million and $106 million. We expect adjusted OIBDA between $58 million and $60 million. For the full year 2008, we expect total revenue between $360 million and $365 million. We expect adjusted OIBDA between $180 million and $185 million.

In addition, we expect the combined amount of the AMC Loews and Consolidated payments to approximate $6 million to $7 million for the full year. Our Q3 financial guidance is based on booked national ad revenue to date. And our Q4 uidance reflects an assumption that we book a similar amount of national revenue from this point forward as we did last year. You should note this guidance assumes zero new make goods being generated in Q3 or Q4.

With that, I would like to pass the call back to Kurt for some closing remarks, before we open up the line for your questions.

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

This combined with the long-term commitments of our content partners and other long-term relationships, like we just completed with Sprint, should soften any short-term impact on our business of a softer economy.

That includes concludes our prepared remarks, and we will now open up the lines for any questions.

Thank you. (OPERATOR INSTRUCTIONS). First to Eric Handler with Lehman Brothers.

Thank you very much. Guys, can you talk about if you start providing more inventory for your content partners, what is sort of like a target level that you would be looking for from these relationships, in terms of the amount of inventory that would be allocated to them? And sort of where does that stand right now?

And then secondly, can you just give us a little perspective on, did the Olympics have any impact at all on what you are seeing in the third quarter?

Yes, Eric. The first question is we are not actually giving the content partners any more inventory. They are actually committing to higher levels of dollars as they renew their contracts, and to higher CPMs. So the amount of inventory they get is just the calculation of committed dollars sort of divided by CPM, if you will.

And they spend in the land and the lobby, not just onscreen.

So we allocate that. Some of the money they are required to allocate to the land and the lobby. The amount of inventory is really not the issue. The amount of content they get is still the 2.5 minutes, and so on, so nothing all that much structurally has changed, other than the overall commitments have gone up.

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

Thank you.

Yes.

Next question from Barton Crockett with JPMorgan.

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

The percentages last year obviously are much higher, because our budgets were much lower last year.

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

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

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

It is the same absolute dollar value, even though you have more inventory to sell?

Correct.

Then switching gears a little bit, in terms of the situation with Screenvision, can you give us any update there? I know that they have been competing with you, and that has caused some issues in the market. I know that there is discussion about what possibilities are there for maybe you guys to do more with their partners, and various ways to get there in terms of their theater network partner. Can you give us an update on what you are seeing there?

Yes. We are continuing to see certain contracts where we compete against Screenvision. For some reason, as we have indicated before, may seem to be a little bit of an increased level of what I will call price competition. As we indicated, that resulted in a few contracts that we didn't go for. But it has really died down a little bit. I don't know whether that is just the summer, or whether, I don't really know what the reason is.

I mean, we are obviously, as we have indicated, pretty well booked for third quarter, so we haven't really bumped into them all that much in the third quarter. And a few deals that are being tossed around in the fourth quarter.

I wasn't really sure where you were going with your second question. Were you talking about an acquisition, or what were you talking about?

Yes. I guess I was trying to be too cute with it. What can you tell us about the fact that it seems like their partners are evaluating alternatives, and they are co-owners and Screenvision might not be a core holding for them?

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

Clearly we are just sort of watching to see how the market is developing, seeing what effect the Loews transition over to us has had. And we will just kind of take it one day at a time. Really not a lot of urgency on our part, I guess at this point, would be the way I look at it, but always interested to talk about a deal that makes sense and is accretive.

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

Obviously the client that you suggested, and there are others, are used to buying television at somewhat lower CPMs, somewhat less prime time-oriented inventory, and so on. So what we have been working on is to really try to help them understand, their agencies in some cases, and the clients in other cases, help them understand the value proposition of cinema.

And clearly a lot of these guys are getting hung up in the math of, well, if I put your higher CPMs in, my gross rating points go down. While mathematically that is correct, it is our job to convince them a rating point, if you will, or impression in a cinema is a heck of a lot more valuable, than it might otherwise be on television, or some of the other mediums. That is the job that we are doing.

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

Scott Barry with Credit Suisse has our next question.

A couple of questions mostly regarding the Loews transition. First, once Loews was turned over and you got a look at it, could you just comment on how that sold Loews inventory impacted your prior expectations for the third quarter?

And then secondly, can you give us any color at all on conversations you have had with exclusive Loews clients, once the asset was turned over? Any successes there? Has there really been any change in the tone of the conversations with clients in general, now that you control that asset? Thanks.

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

And so we got a reasonable, good payment from AMC of the payment they were going to get from Screenvision in June and July and August we were expecting. So I think that is really good news for us. Because it gave us good lead time to go out and sell the inventory that we have available, which is primarily in the October/November timeframe, which is the end of the runout period. So no real surprises there, quite honestly.

As far as clients go, the ABC Family deal that we announced, ABC Family actually advertised with Screenvision this year, so that was obviously a movement of money that we were happy with. There have been a couple of other contracts where clients either are considering us, or in the past maybe have gone maybe 100% with Screenvision, are now splitting the deal between us and Screenvision. So as I said in my comments, there are some signs that we liked. But it is still a little bit early to tell. And I think we'll know more about it when we start really getting into the sale of the October/November inventory.

Okay then I may have missed it, I apologize. But did you mention what your market share is now of the top 10 and top 20?

Yes. We said approximately 75% of the Top 10, and 65% of the Top 50.

From Morgan Stanley, we will go to Hunter DuBose.

Can you tell us what assumptions are baked into you fourth quarter guidance regarding total domestic box office performance? And to the extent that that we see a repeat of the 100% maxed out utilization for this year, as we did see in fourth quarter of '06 and '07, does that tend to imply potential upside to your numbers, to the extent that the box office outperforms whatever you are assuming?

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

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

Given the tendency in the last Q4 quarter periods we have had for '06 and '07, given the tendency to max out at 100% utilization, or even go beyond that when you have added extra units, do you have a sense of what sensitivity there is for your fourth quarter guidance number, to the extent that there was a very strong box office in excess of what you are expecting?

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

I just wanted to really get a sense of what the sensitivity is. Especially in the context of adding on all the Loews screens as well, does that mean that it is less likely for you to be able to max out at 100% this time around, or do you feel pretty good about that?

We are going to have a lot more inventory, Hunter. As I said in my remarks, and I think Gary mentioned it too, our projections leave a lot of inventory to be sold. So clearly, if there is a very vibrant scatter market that materializes in the fourth quarter some time, we are going to have the inventory to handle it. We have not only got the Loews inventory, the 53rd week, we also have that extra Regal 30, so it is not across our whole network, it is only in the Regal circuit, but it is obviously a lot of inventory.

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

No. We said that for Q3. For Q4, it is based on the bookings we have, plus a similar amount to what we booked last year from this period, from this point in time on.

Okay.

So it is a number that we could range in on. So as to Kurt's point, that would still leave significant inventory for make goods. Or if the scatter market improves, and we have got more things to sell, we have got the inventory to do it. I think just for some reference points, last year we had $4 million of make goods at the end of the year. I think it was approximately $3.2 million of which were generated in Q4. As you know, it was pretty weak last year. The year before that, I believe we ended the year with $2.6 million in made goods. So those are some bookends I guess for you to get a comfort of what could be a magnitude of.

The other thing that is important on the make goods, and Gary mentioned it in his comments, is that the first two months of any quarter aren't the most important months to really worry about from an attendance shortfall. It is that last month, because that is the month where if you don't reach your attendance goals that are implicit in your advertising contracts, that revenue will then get deferred into the next quarter.

So given that December is going to effectively have that 53rd week in it, I think the make good risk in the fourth quarter are somewhat less than it would otherwise be, just because of that 53rd week.

(OPERATOR INSTRUCTIONS) Rich Greenfield with Pali Capital.

Hi. Two questions. The first question, just thinking about the growth in CPMs. You were able to reach a pretty significant increase year-over-year with utilization down a lot.

I am just wondering if you could give us a feel for why the customers that were still willing to do business with you this quarter in terms of that 66% utilization, why they were willing to pay so much more year-over-year? Was it just the mix of customers? What is in that mix that drove that CPM up so much? And how do you think about the trade-off of the CPM being up 4% or 5%, but having higher utilization as you think about that balance? Is that really what you are discussing that we should expect lower CPM increases as we move throughout the rest of the year, but higher utilizations?

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

The last question. You are implicitly selling it, because in our projections and in the contracts that we sell to the clients, the attendance from that 53rd week is in that. So before we turn the sales force loose, if you will, on each flight, the attendance is estimated for them, and that is the attendance they sell to the client.

So the answer is, it is implicit in the contracts that we are selling. And oh, by the way, it will create incremental attendees that we can use for make goods, and the answer is kind of yes to both questions.

The trade off to the CPM utilization is really an interesting one. And obviously one could say were there some contracts in Q2, that on hindsight maybe you should have taken, just because you had -- your CPMs were so high with all of the other contracts? I guess I would be hard pressed to say no to that. I would say that in at least one or two cases, it might have been the right thing to do. On hindsight always hard to tell.

But I can tell you in one case, we actually said no to somebody that has now come back to us, and in 2009 we have signed them on at a much, much higher CPM than we believe the deal got done in 2008. So it can kind of work both ways. It is always a little bit of a crap shoot on whether you are doing the right thing to accept that lower CPM.

Now having said that, I hope you could get from our comment, that we are clearly mindful of this issue of there is just so much money out there that is willing to pay the higher CPMs. And at some point, you are going to have to create a relationship or a structure, with clients that are used to paying lower CPMs, and are only comfortable paying those lower CPMs.

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

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

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

I think what we found was obviously the latter. And there was almost a bifurcation. The clients who like cinema, traditionally buy cinema, some of the sectors that I talked about, some of the car companies, and so on, they are going to pay for the placement they want in cinema, and we are going to get a higher CPM.

It is those clients that are new to cinema or are more price sensitive, are the ones that we are really focused on right now. Quite honestly as far as I am concerned, that is one of the key aspects of our focus over the next several quarters is going to be getting those other clients, other types of clients that spend all year round, maybe not at the higher CPMs. But as you can see, we have got a really pretty good core and base of clients, including our content partners, that pay good CPMs. So that is a good thing for us.

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

But there is nothing unique from the standpoint of the types of advertisers? Meaning, it wasn't like the content partners who advertised was a much percentage, and they are at a higher CPM, that drove that 12% increase. I just don't understand why it was so high?

In fact, Rich, as we talked about and one of the good factors affecting our second half is a lot of our content money this year was delayed into the second half.

So the only thing I can tell you is that, as you probably know, and this is true in television, there are a group of clients last sectors, that are willing to pay higher CPMs, because they want to get their ads placed when they want to get it placed. I think advertisers are also willing to pay higher CPMs when they are launching a product, and the timing of those ads are critical.

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

We have a follow-up question from Barton Crockett.

Great. I was just wondering -- I will try a little bit more specifically on the guidance, if there is any shading you are prepared to give us on the CPM growth in the second half, or the utilization change in terms of the constituent parts of the revenue there?

No, we aren't going to give that kind of detail at this point. Sorry about that. But I think the farthest we are going to go for now on the guidance is with the revenue and the OIBDA.

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

I don't really have anything else to say, other than thanks very much for joining us, and thanks for your support. And we continue to push this business forward, and I think we made a lot of progress. Our third quarter results, as we just showed you, I think show a lot of growth at a time period when a lot of other mediums are actually declining. So that obviously was a good sign for us, and we are going to continue to really push hard on this business. So thanks very much.

With that, we will conclude today's teleconference. Thank you for joining us today.