National Cinemedia Inc (NCMI) 2011 Q2 法說會逐字稿

Greetings and welcome to the National CineMedia Incorporated Second Quarter 2011 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Oddo, Vice President of Finance for National CineMedia Incorporated. Thank you, Mr. Oddo, you may begin.

Good afternoon. I'd 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 the statements of historical fact communicated during this conference call may constitute forward-looking statements.

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

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

Thanks, David. Welcome, everyone, and thanks for joining us for our Second Quarter 2011 Earnings Conference Call. Today, I will provide a brief overview of our Q2 results and provide some thoughts about the rest of the year. Gary Ferrera, our CFO, will then provide a more detailed discussion of our Q2 financial performance and provide guidance for Q3 2011 and an update of our outlook for the full year. And then, as always, we'll open the lines for questions.

I was very pleased with our progress that we made in Q2, as we again exceeded the top end of our guidance range, with adjusted OIBDA growth of 16.6% over Q2 2010, as both our advertising and Fathom businesses posted strong revenue growth.

We have also made great progress expanding and improving our network and, as Gary will discuss in more detail in a few minutes, we increased our liquidity and lengthened our debt maturity at attractive long-term interest rates.

Our Q2 ad business growth, excluding beverage, related primarily to strong demand from nationally recognized clients advertising regionally, large regional clients, as well as a moderate increase in national revenues.

We also benefited from a lower make good due to a higher June theater attendance that skewed towards PG-13 and R rated films, while our national revenue benefited from higher 3D advertising and an increase in the allocation of annual content partner spend to Q2 2011 versus Q2 2010.

As we discussed on our prior call, our Q2 national inventory utilization was impacted negatively by delays in spending in certain of our Japanese auto and consumer electronics clients. While some of the campaigns have been rebooked for later in 2011, some may be delayed into 2012.

Despite this delay in spending by certain clients in Q2, our national sales team continued to make great progress towards expanding our national advertising client base. During the first six months of 2011, 22 new clients have made 2011 commitments, including nine in Q2. These new Q2 clients were primarily in the military, telecommunications, insurance, movie studio, cable TV, computer hardware and prepared foods categories.

Our online mobile initiative is also beginning to provide more benefit as clients look to execute integrated marketing plans across our online, mobile, lobby and on-screen inventory. As part of this strategy, the new social version of our mobile app, Movie Night Out, started to gain traction as we are approaching 1 million downloads and sessions per user increased.

Our Q2 local advertising business significantly exceeded our expectations, with revenue growth in the current quarter of 23%. Our strategy to focus on larger regional clients, as our network market penetration improves, has been very successful.

We have also benefited from high local sales force retention rates as our local advertising business management has done a great job with training and other job quality initiatives. While the overall number of Q2 contracts was down 15% versus Q2 2010, our average contract value increased 45% during the quarter. In fact, the number of regional clients that were greater than $1,000 -- $100,000 increased by 55% and represented approximately 43% of our Q2 local revenue versus approximately 23% in Q2 2010.

This shift reflected continued cautious spending by smaller, single-location clients and strong demand by larger regional clients and regionally focused spending by nationally recognized clients.

Spending categories that showed the most strength included insurance, auto, amusement parks and tourism.

Q2 was one of the best quarters ever for our Fathom consumer division, with 28 event nights during the current quarter, nearly double the number of consumer events held and revenue that was up nearly 170% versus Q2 2010. In addition to a favorable shift in the metropolitan offer schedule, Q2 had several other successful events, including four nights of the Tony Award winning play, Memphis, a special event that featured the Lord of the Rings Trilogy over three nights and the third liver installment of the LA Philharmonic. We even worked together with Screenvision to bring the Broadway Event Company to our Fathom network.

This strong Q2 for the consumer division more than offset a weak quarter for the Fathom business division, as a slow to recover economy has resulted in larger companies remaining cautious with their discretionary spending on corporate communications and marketing events.

Both our advertising and Fathom businesses continue to benefit from the expansion and improving quality of our national network. During 2011, we have already signed four new network affiliates with approximately 620 screens and 17 million annual attendees, all of which will be added to our network by the end of Q3.

Our most recent affiliate deal with the Southern Theater Circuit reflected a new deal structure that significantly increased our cash flow margin on the deal, in exchange for an up front payment.

In addition, approximately 835 Rave and Regal consolidated screens with over 30 million annual attendees were added to our network during June, when their advertising contracts with Screenvision expire.

Once all of these circuits are added by the end of Q3 2011, we estimate that our network will include over 18,500 screens or nearly 50% of all US screens. More importantly our approximately 700 million annual attendees will represent 72%, 70% and 67% of the attendance associated with screens showing national cinema advertising in the top 10, 25 and 50 VMA -- US VMAs respectively, and approximately 64% of all US attendance associated with screens showing national advertising.

While this was very good progress, we are not done yet, as we continue to have productive conversations with many regional theater circuits that will provide better coverage in smaller VMAs and the suburbs of larger VMAs and will improve our competitive positioning even further, versus other media networks.

As our network continues to expand, we are at the same time improving its technical quality, as the founding members aggressively deploy digital cinema projectors through the DCIP partnership and we add network affiliates, who have already deployed or are in the process of deploying the new technology.

As of last week, we were playing our advertising preshow on over 6,100 digital cinema projectors or 36% of our 16,775 digital network screens.

By mid to late 2012, we expect that approximately 90% of our digital advertising network and nearly all of our Fathom broadcast network screens will be equipped with the higher quality digital cinema projection technology.

This will not only provide higher quality 2D images, it will also provide a significant national 3D advertising network with multiple 3D screens in every digital theatre and the largest live 3D entertaining network in the world. In fact, this new technology has already begun to provide benefits as we have sold approximately 15 minutes of 3D ads across parts of our network to 10 different clients in 2011.

With these additional ad units and CPMs that average from 50% to 100% higher than our average 2D CPM, our 2011 3D advertising revenue is already 146% higher than all of 2010.

We also held our second live 3D Fathom event as we distributed the men's and women's finals at Wimbledon in early July, across our expanded live 3D network. While we expect 3D to continue to provide future revenue upside for us, broader adoption of the 3D medium will take some time, as advertising creative agencies and entertainment and sports programming producers get comfortable with the new medium.

It will also be important that broader distribution is created on TV and handheld devices, so our advertisers can better amortize their production costs.

Looking ahead, with the continued expansion of our network and client base, we are expecting solid growth in Q3 versus a record Q3 2010, as advertising demand and proposal activity remain strong, with third quarter already booked ahead of a very strong Q3 2010 and our expanded impression base and higher commitment levels for Q4, we are narrowing our annual adjusted OIBDA range to reflect our greater confidence that our existing guidance midpoint will be achieved.

We have also recently finalized two-year commitments for all of the content partner packages that were expiring at the end of this year and have finalized the renewal of the multi-year agreement related to our cell phone courtesy PSA.

The new content partner deals include the renewal of a full package and an additional half package by a cable channel group, the half package by an independent film studio and a full package commitment from a major broadcast network group.

With the greater visibility for the remainder of 2011 and positive outlook for 2012, I was pleased that we were able to continue to increase the current return to our shareholders. The 10% dividend increase recently approved by our Board is in keeping with our commitment to distribute a significant portion of our free cash flow to our shareholders.

That's all I had, so now I'll turn over the call to Gary to give you some more details concerning our Q2 financial performance and our guidance for Q3 and the year.

Thank you, Kurt. I will now spend some time reviewing our second quarter financial performance in a bit more detail as well as discuss our guidance for Q3 and full year 2011.

For the second quarter, our total revenue increased 15% to $114 million, driven by a 9.4% increase in total advertising revenue (inaudible) increase in Fathom events revenue to $15.4 million.

Total Q2 adjusted OIBDA increased 15.6% to $57.7 million from $49.9 million in the second quarter of 2010.

Our Q2 adjusted OIBDA margin increased to 50.6%, up from 50.4% in 2010, as the impact of the national ad revenue was somewhat offset by higher growth in the lower margin Fathom events and local advertising parts of our business. The increased network affiliate screens also had a small negative impact on our margins.

Our advertising revenue mix for Q2 2011 shifted a bit and was 68% national, 21% local and 11% beverage, versus Q2 2010, which was 71%, 18% and 11% respectively. Total advertising represented 86% of our total Q2 revenue versus 91% in 2010.

Q2 national ad revenue, excluding beverage grew 5.6% to $67.7 million, from $64.1 million, driven primarily by an increase in impressions sold, while our utilization rate remained relatively consistent at 91.5% versus 92.5% in Q2 2010.

This rate was across the 6.4% increase in our Q2 attendance base, which was related to the rebound in the theatrical box office and the addition of several network affiliates. A 2.9% increase in CPM also contributed to our national ad revenue growth.

We entered the second quarter of 2011 with approximately $800,000 in make goods and as of the end of the quarter we had approximately $2 million of make goods. This is -- this was significantly lower than the Q2 2010 balance of $4.6 million, due to the performance of PG-13 and R rated films versus the impressions sold.

Our Q2 beverage revenue increased 11.5% to $10.7 million, versus $9.6 million in Q2 2010, driven by the 6% contractual CPM increase and a 5.7% increase in founding member attendance.

The impact on OIBDA of this revenue increase is partially offset by an increase in the attendance based portion of the theater access fees, as both are driven by the level of founding member attendance.

Our Q2 2011 local advertising business continued to improve, as local revenue increased 23.2% to $20.2 million from $16.4 million in Q2 2010, with average same-screen sales increase of approximately 19.6%.

Total Q2 advertising revenue per attendee increased 1.8% to $0.56, with our local ad revenue per attendee increasing 20% to $0.12 per attendee and our national advertising revenue per attendee, excluding beverage, decreasing 1.4% to $0.38 per attendee, reflecting the impact of the 5.6% national revenue increase and the 6.4% increase in Q2 theater attendance.

Our combined Fathom events business had a very strong quarter, with revenue increasing 73% to $15.4 million. This growth was driven by 168.9% increase in Fathom consumer revenue, to $12.1 million from $4.5 million in Q2 2010.

The number of events increased to 28 from 15 in Q2 2010, with the number of event sites increasing 123% and revenue per event site increasing 22.8%. This growth was partially offset by a 25% decrease in Fathom business revenue to $3.3 million from $4.4 million in Q2 2010, as the division continued to be negatively impacted by the slow economy.

Looking briefly at the diluted earnings per share for the second quarter, we reported GAAP EPS income of $0.16 versus income of $0.11 in Q2 2010, reflecting a higher operating income and lower interest expense as well as low change in the fair value of our interest rate hedge.

We continue to expand our network and as of June 30th, 2011, we had 18,137 total screens in our network, representing a 6.1% increase versus the end of Q2 2010. This increase in total screen count was primarily driven by the addition of approximately 985 circuit screens and the net addition of approximately 60 founding members screens, that included the [Rebo] consolidated screens, partially offset by closures of underperforming, and in most cases, non-digital locations.

Approximately 16% of our net worth is now composed of affiliate screens versus approximately 11% at the end of Q2 2010.

Approximately 92%, or 16,775, of our total screens are connected to our digital network, versus approximately 91% at the end of Q2 2010. These digital screens generate approximately 94% of our attendance.

Our capital expenditures were $4.1 million for the second quarter compared to $2.1 million in Q2 2010, due primarily to the increase in network affiliate additions to our network.

We now estimate that 2011 GAAP CapEx will be in the range of $15 million to $17 million, with the increase driven primarily by the cost of connecting our recently signed network affiliates to our digital network and tenant finishes associated with our corporate office expansion and lease renewal.

While these tenant finishes will be capitalized during 2011 for GAAP purposes, they will be fully reimbursed by the landlord, reducing GAAP rent expense over the term of the lease. Thus our actual cash capital expenditures for 2011, will be in the $13 million to $15 million range, or approximately 3% of our revenues. This estimate also assumes that no additional network affiliate agreements are signed during 2011.

Moving on to our balance sheet, before considering the impact of our debt restructuring, completed in July, our total debt outstanding as of June 30th, 2011, was $760 million, comprised of a $725 million term loan and a $35 million balance on a revolver versus a $52 million rebalance -- book balance at the end of Q2 2010.

The revolver balance, net of $10 million of MC and LLC cash and cash equivalents, was approximately $25 million at the end of Q2 2011 versus $42 million at the end of Q2 2010.

At quarter-end, we had approximately $55 million of investments in NCM Inc. versus approximately $46 million as of July 1st, 2010. Our short and long-term investments are comprised of marketable securities, such as commercial paper. A portion of the $55 million NCM Inc. balance is reserved for income tax payments and tax receivable agreement payments of founding members.

Excluding these tax-associated reserves, that our current increased dividend rate at the end of Q2 2011, we'd be able to pay approximately four quarters of dividends, even if no additional cash were distributed up to the NCM Inc. versus -- from NCM LLC.

As of June 30th, 2011, and before our recent debt restructuring, approximately $550 million of our $725 million term loan was fixed, under interest rate swap agreements at approximately 6.5% and the remainder was floating rate debt at approximately 1.8%.

The average interest rate on our $725 million term loan was 5.4% for Q2 2011 versus 5.7% for Q2 2010. The average interest rate on our revolver borrowings was 2.3% in Q2 2011 versus 2.6% in Q2 2010. Our pro forma leverage at NCM LLC as of June 30th, 2011 was 3.5 times, trailing four-quarter adjusted OIBDA, including the Regal consolidated integration payments, versus approximately 3.9 times as of Q2 2010. You should note that we are well below our financial covenants of 6.5 times as of June 30th, 2011.

I'd like to now provide an update on the recent change to our debt structure. On July 5th, 2011, NCM LLC issued $200 million of senior unsecured 10-year notes at a fixed rate of seven and seven-eighths percent, with interest payments due January 15 and July 15 beginning in 2012. The note proceeds were primarily used to pay down the $175 million non-hedged portion of our $725 million term loan and to pay down $20 million of our revolver balance and pay deal expenses.

In conjunction with the note offering, we executed an amendment to our bank agreement that extended the maturity date of our revolver from February 13th, 2013 to December 31st, 2014 and increased our revolver borrowing capacity from $80 million to $119 million, with both amounts inclusive of the $14 million Lehman commitment.

While the margins on outstanding balances for both the term loan and the revolver will remain the same, the commitment fee on unused revolver balances will increase 37.5 basis points to 50 basis points.

These transactions will allow us to significantly increase our liquidity by extending our revolver maturity and availability, while diversifying our capital structure. They also reduce the refinancing risk on our term loan and extended our average debt maturities at a very attractive, historically low fixed rate.

This restructuring also positioned us very well, should market interest rates begin to rise as expected, as our revolver borrowings represent our only floating interest rate exposure.

Turning to our Q3 guidance and annual outlook, for the third quarter, we expect total revenue to be in the range of $136 million to $139 million and adjusted OIBDA to be in the range of $78 million to $81 million, implying OIBDA growth of approximately 5% to 9% over a very strong Q3 2010 that had revenue and adjusted OIBDA growth of approximately 31% and 44% respectively over 2009.

With respect to our bookings and outlook, our second half 2011 booked and pending total advertising revenue, including content partner, beverage, cell phone PSA as well as national and local scatter contracts are up approximately 11% versus the comparable second half 2010 amount.

We are closing the gap reported on our last call, back in May, as we now have approximately 81% of total advertising revenue implicit in the midpoint of our full-year guidance range booked and pending, whereas last year, we were at approximately 83% of our lower actual 2010 total advertising revenue.

While overall economic growth continues to be slow, with this improved bookings data, since our last call, and strong proposal activity, we narrowed our annual guidance range and now expect total revenue to be in the range of $460 million to $470 million and adjusted OIBDA to be in the range of $236 million to $246 million.

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

Thank you. (Operator Instructions). Our first question comes from the line of Eric Handler with MKM Partners. Please proceed with your questions.

Hi. Thanks for taking my question. When I look at your third quarter, based on your guidance, we are seeing some significant deceleration and revenue growth versus the second quarter.

Is there anything besides difficult comparisons that you're seeing in the market that would cause a slowdown? And then similarly, we got a big jump in fourth quarter, looking at somewhere north of 20% revenue growth. What gives you confidence that you can achieve that number?

Yes, Eric, the big thing in Q3, as you may recall, we were up almost 40% last year, over Q3 of 2009. So some of it was a comp issue and obviously with the high sell-throughs in July and August in particular, there's not as much room for growth in the second -- in the third quarter as there is in the second quarter. So the sort of high single, low double-digit growth we're talking about in the third quarter, I think, is a pretty good accomplishment. At least we're pretty happy with that. And we're not done. Obviously we've got some more selling time in the third quarter left.

So your second question on fourth quarter, one of the big drivers of the fourth quarter for us is a fairly significant increase in impressions. As Gary and I both talked about, we had a lot of circuits coming on mid-year, sort of the June through July time frame, and it takes about a quarter to get those implemented from a technology standpoint and also to get them into our selling queue and into the contracts that we sell nationally.

So that's one of the drivers that normally isn't there. It would be sort of analogous to a television network saying the ratings were up, as a driver of their growth. And it's the same thing for us, except in our case it's attendance or impressions.

We also feel pretty bullish about the comps that the theater operators have. Fourth quarter, I think, is a pretty easy comp for them. So it's going to be a pretty good growth in attendance, we believe, in fourth quarter for them.

Great. Thank you very much.

Thank you.

Thank you. Our next question comes from Alexia Quadrani with JP Morgan. Please proceed with your questions.

Thanks. This is Townsend Buckles for Alexia, with just a few questions. You seem to have tough comparisons in the second half in terms of inventory utilization. And you obviously have a lot of inventory coming on. But do you feel you can match your -- or come close to those levels you had last year? I think you mentioned the third quarter is almost essentially booked?

Yes, well, third quarter, the message we're sending is that our utilization will be comparable with an increase in impressions, so that's how you get the growth, effectively, in the third quarter.

The fourth quarter's got an even bigger jump in impressions, and as you may recall, there weren't a lot of impressions last year because the theater industry had a fairly tough quarter.

So the combination of overall industry growth in attendance plus the number of new theaters that we've brought on really picks up our impressions fairly significantly.

And the market that we're seeing out there is still -- the advertising market's still pretty vibrant, and the big surprise that we talked about this last quarter is our local/regional business.

And I might note that some of that money that we call local or regional is national clients that are just spending on a little bit more targeted basis, and that's one of the things that our network growth has really allowed us to do, is not only compete more head-on-head with local newspaper, radio, TV spot, television and, say, billboards, but to also compete in state-wide deals, where insurance companies and theme parks and other things like that, that want to advertise across the whole state.

Our concentrations now and the whole size of our network and geographic coverage in some of those areas that we've gotten over the last couple of years, through our expansions, has really helped us.

We did have a few clients that came back to us that we were -- had originally been talking to about a national campaign and we turned it into a regional campaign very effectively.

Okay. And then on the Fathom business, we saw another player in the industry recently announce they were going to focus on alternative content in theaters as a big opportunity. Is the space becoming any more competitive? And if so, could we take this as a greater interest and a sign that maybe a critical mass is being achieved in the digital projector that may expand this opportunity for you further?

Well, yes. Clearly the digital cinema projectors is something that we see as a growth driver for Fathom and clearly the 3D opportunity is there. But we also have a lot of creative people who like the idea of showing their content on digital cinema projectors versus the LCD projectors.

So we are seeing a lot more pick up there. As I mentioned in my comments, we had our largest quarter ever, June in particular was very significant. We had a week or two in June that we had an event almost every single night.

So there's clearly some traction there, but I point out that it's still all about the network. You've still got to have the distribution to be able to attract this content and to make it financially viable, if you will, for the content owner. And as we compete more heavily with television to try to get either content on a simulcast basis or on a first basis, if you will, it's all about the distribution. Because you've got to make it worth their while.

And, finally, is there operating leverage you can drive in that business to improve profitability at some point?

Well, I think there is. I mean, there's a big amount of variable costs, clearly, that the higher the revenue, the higher the costs are going to be because you do do a rev share with both the content owner and the circuit. So there is a limit.

But clearly the more events we have, the better we're covering our fixed marketing and administrative distribution costs and we have seen an uptick in the margins because of that.

Okay. Thanks a lot.

You bet.

Thank you. Our next question comes from the line of James March -- Marsh, with Piper Jaffray. Please proceed with your question.

Great. Thank you. A couple of questions here. First, on Fathom, obviously in the second quarter you guys had outstanding performance, up 75% plus. In part, I guess, driven by more titles. What's the schedule look like as we look into the third and fourth quarter? I mean, do you have visibility there on just the total number of titles in Fathom?

And then, I guess, secondly, just related to the -- I think it's -- you said it was the new affiliate deal structure, you mentioned, could you elaborate a little bit more on that? Just how different it is? Are there specific cash needs that you need to kind of roll that out in a meaningful way? Or do you expect to see that, I guess, structured going forward?

Well, it depends on what you mean by meaningful. Clearly, part of the theory on doing our refinancing that we did and creating more liquidity at the operating company level, part of that thinking was that -- to be a little bit more flexible in how we deal with network affiliates. And you saw that in the Southern deal that we did.

The question is, how many more are there out there? I think that's the right question. There are quite a few individual regional circuits, but they're reasonably small. And so we're going to continue to go after them and we're going to be more flexible in the way we deal with them and the structure we deal with them. And we have the financial flexibility to do that now.

What was the other part of your question? Oh the Fathom. Yes, the visibility of Fathom. Yes, we clearly have pretty good visibility per second and our third and fourth quarter, fourth quarter in particular, because we'll be starting another season of the Met in the fourth quarter. Actually, I guess it's all in the fourth quarter. It starts in October. The tickets will go on sale soon. And we had a lot of visibility there.

Every year, our visibility gets better and better because the key to that business is really going more series -- event series on board, so that you can have a base of business going into any given year and then you can just fill in around with one-off, single sort of night events that will be a continuing big part of the business.

The problem, of course, with having single-site, one-night events on an ad hoc basis is it does provide a little bit less visibility.

It's not much different what -- how we've developed the advertising business, where our content partners deals and our cell phone PSAs and other things that we've done on -- that provide a bunch of up front money, so we're not starting every year out at zero, has been very, very important to the growth of our business and we will be doing the same thing on the Fathom side.

Clearly the Metropolitan Opera has been a very successful series. We launched the LA Philharmonic last year and are looking to do it again this year, in our coming year. And there's a number of other series that we're working on, nothing that I can really talk about yet. But we are -- that business is accelerating for us, and as I mentioned before, I think it's a combination of our network growth, our capabilities from a technology standpoint and the quality associated with digital cinema.

Great. Thanks very much, Kurt.

You bet.

Thank you. Our next question comes from the line of Mike Hickey with Janco Partners. Please proceed with your questions.

Hey, Kurt and Gary. Congratulations on a great quarter.

Thank you.

Obviously it looks like the market here is struggling, fairly significantly, with concerns over poor economic growth and, Kurt, I was just curious about your perspective or economic outlook and how it relates to your business and how potentially more defensive it is this time around than last?

Well, clearly there's a lot of uncertainty. You don't live through a day where the Dow is down 500 points and say that there's not a lot of uncertainty out there.

I hope what we're seeing now is sort of the hangover from all the uncertainty that our friendly people in Washington have created and that there's a lag effect. And if we can start to create a little bit more certainty in the marketplace, we can provide a better business environment, so people can start to make long-term decisions, and people's feeling about just what's going on in the world are better.

I think people tend to spend more and do more things when they feel better about what's going on and I think our government's done a really poor job at creating the kind of certainty that we need in this company -- country. Obviously the recent debt debate is just one example of that.

So, clearly there's a lot of uncertainty right now. I think you're seeing that in a lot of multiple compressions. Obviously a flight to safety over the last several days. I'm hoping that things start to slowly turn around. I think the -- the idea of a double-dip recession, we don't think there is a lot of risk in that. Although, it's not zero.

But our business continues to perform very, very well and one of the things that I think that I was most impressed with was our local and regional business. Because while the single location clients are clearly struggling, which that sort of Main Street, if you will, that's referred to. Our ability and our flexibility now with our network to shift to a more regional strategy has really, as we said in our numbers, significantly more than offset some of the softness we're seeing.

I think if there's any soft spot that the economy is going to create in our business, it's really in the local, local. But I think we've clearly proven in this last quarter, we've got a competitive and strategic response to that, which is very, very effective.

The other thing I would say is that eventually, and over the next six months, Japan's going to get back online. And while we saw a significant decrease in spending by Japanese autos and Asian autos in general, it was more than offset by US autos in the second quarter. That spending by the Japanese autos, we know, is going to come back. Because they're going to get back online. They're pretty much there already. And I think there is going to be a positive impact, at least on our business, later this year and into early next year.

I also -- with the content partner renewals that we did, and other things that we're doing on sort of an up front basis, that gave me some comfort about the future for us as well.

Yes, and Mike, it's Gary. The other issue too is, I mean, we don't know, in Q4, whether the world will change. But if you're sitting here just looking now, I mean, we're almost on track, 81% versus 83% last year, and that includes us being down in the first quarter and partially in the second quarter.

So it's -- everything we see in our bookings and pendings and everything like that, that we see to date, are all very positive.

Okay. Thanks for the insight, guys. I appreciate it.

You bet.

Thank you. Our next question comes from the line of Ben Mogil with Stifel Nicolaus. Please proceed with your questions.

Hi. Good afternoon. And thanks for taking the questions. So two questions. So first of all, we've seen the box office, really, in the first or really more in the second, so far in the third quarter, be largely attendance and not price generated. Are you seeing advertisers notice this trend and helping you out when you go before RFPs, particularly for sort of first-time clients in cinema that growth is not just pricing, but there's actually more bodies going in the doors here?

Well, it's something we obviously bring up. I don't know if the media buyers actually pay that close attention to the cinema business to actually figure that out, although there's been an awful lot of press about the decline in the percentage of 3D and obviously a few analysts out there that have pounded on it pretty good.

I would tell you that for the theater circuits, even at a 25%, 30%, 40% penetration of 3D tickets, it's still a grand slam home run for theater operators.

Clearly we like more bodies and so do the theater operators. But any time you can make a change or a new technology and bring it into your business and sell 20% to 40% of your tickets at a fairly significant premium, isn't that a good thing?

And, yes, maybe there were some people out there that had expectations that every film is going to have 50% or 60%, but I think that was generally unrealistic to begin with and where it settled out is, quite honestly, from our standpoint, not all that surprising.

The good news for our business specifically is that we are seeing some reasonably good traction for -- on people looking at using 3D to differentiate their brand, to get more attention to their brand and cut through the overall market clutter. An awful lot of big -- fairly significant increase.

It's still not a significant amount of our revenue, but it certainly doesn't hurt during these time periods when other things are struggling a little bit and it has been one of the drivers of our growth, as we talked about before. $4 million or $5 million here and there with 3D is a fairly significant increase for our business. And we continue to see pretty good interest in people doing 3D ads.

We've had double the number of advertisers this year, so far.

Yes.

That we had last year.

Yes, and you remember -- you may recall, we launched our first 3D ad in April of last year. So it's been a pretty good run for us and the good news about that, from our standpoint, because of the increase in the number of screens that are coming on every single day, our 3D distribution capabilities increased virtually every day. So the number of impressions that we're going to have to be able to give to people on a 3D basis is increasing almost every day.

Sure. Okay. That makes sense. And I mean, I think you're -- I think you're probably right that the average press buyer doesn't see the sort of this quarterly nuances that have a sense of what the mix shift is on -- between attendance and pricing.

Flipping over, just very quickly, to the Japanese auto situation, we see now Toyota and Honda raise their guidance for the year. Any reason that you don't think that they raise their advertising faster than what you've got sort of projected?

Well, the only question for us, and it was one of the cautions we made at our last call, was whether they do the spending this year or next. And we're sort of getting -- some are saying late this year, some are saying maybe early next. Could that mean some money that wouldn't ordinarily have fallen into first quarter? Yes, possibly. But we do think it's going to come back. They need to sell their cars and as soon as they get those cars to the showroom, they're going to start to advertise.

And so we are talking to a lot of the Japanese autos about ideas and we do think it is -- it will be a future driver for us and it did create a delay in spending in second quarter, which we talked about and told you all about at our last call. But we do think it will help the future.

Okay. That's great. Thanks, Kurt. Thanks, Gary.

Thank you. Our next question comes from the line of Barton Crockett with Lazard Capital Markets. Please proceed with your questions.

Okay. Great. Thanks for taking the question. I wanted to ask about the guidance, which was taken down as high end, even though revenues and OIBDA exceeded your high end here in the second quarter. What hasn't exactly played out versus your most kind of bullish outlook? I mean, what prompted that trend.

Well, I -- it really wasn't. What we did is that we had a pretty broad guidance range. I mean, we have $15 million between the low end and the high end and clearly we've always tried to put numbers out there that we could clearly get in the range and we've done a really good job of getting above the range. And we felt that the best thing to do, given our greater visibility around our midpoint, which is, I guess, where the market thought we were going to be as well, it made sense to just bring the bottom end up, top end down.

And I don't know whether that will provide any upside or not. I'm obviously not going to comment on that. But it just seemed to make sense to us to narrow the range down and it didn't make sense to get too far ahead of ourselves and ahead of where you guys are on the Street from mid-range standpoint.

Okay. So it's more a caution than anything really changing around here?

I don't know. Yes, a caution, I guess, but the market was sitting there at our midpoint and in this marketplace, getting ahead of that didn't seem to make a whole lot of sense. And we've always, as the year's gone on, tried to take our range to be a little bit more -- a little less broad and that was really what we were trying to do.

Okay. And then I was very interested in the commentary about renewing the content partners.

Yes?

And I was just wondering if you could clarify, is -- the renewals that you've done, does it indicate that the content partners then should be greater next year? And could you give us any kind of quantification of that?

Well, we probably won't until another call or two. I think when we start talking more about next year, it's probably more appropriate that we talk about that. Also a little sensitive from a competitive situation. And all I can tell you is it's a great thing and the content partner structure has been a very big part of our growth and will continue to be.

Okay. But have you renewed, basically, all the partnership slots that you have globally?

We renewed -- to be clear, and I think I said this, but if not, I'll be clearer. We renewed some and replaced others. And I think that, quite honestly, sends a very positive sign that there's some people that have been really happy and maybe there was a way of creating better partnerships with other people.

Okay. That's great. Thank you.

Yes.

Thank you.

Our next question comes from the line of Marla Backer with Hudson Square. Please proceed with your questions.

I want to switch topics to Fathom, again, because before when you were talking about some of the upcoming Fathom events and you were optimistic, one of -- I think one of the best things or one of the really positive things about the Met is that you get people to buy subscriptions up front. So you get that cash up front.

And I think you specifically used the word series when you talked about upcoming Fathom events. So are we to understand that there is the potential for another Met-like genre that could lead to an up front cash flow stream for you?

Well, yes. And just to be clear, Marla, a lot of people buy their tickets -- our tickets will go on sale mid-this month for next year's 2011, 2012 season.

But a lot of people buy individual tickets. They don't necessarily -- we don't actually sell what, I think you referred to, as a season ticket. Most -- a lot of people buy, in some cases, every one of the events. And in some cases, just certain events. And the cash is collected up front.

I don't know if that's necessarily the most important part of the strategy, is to get the cash up front. It's just, quite honestly, not enough cash to make a difference and it's not a financing vehicle for us in any way.

The more important point is the fact that you create series and what that does for us is create, A, more predictability, but it also is much easier to market a series because the fact that that brand or franchise is in the market over, in the case of the Met, a six or seven-month period, creates significant word of mouth benefits.

And the number of impressions that we create in the marketplace, just from word of mouth and PR and other things that we do not spend a dime on are significant. And that's the beauty of a series.

The problem with a one-off event, you're starting from zero from an awareness standpoint and a marketing standpoint, and so it's much like the studios that every film that they're starting of with a new product, in effect, and they've got to market it as a new product from the start, from zero.

And that's why it's more challenging. And of course, in the Fathom business, or the events business in general, you don't have the kind of budget that a feature film does, to spend on creating awareness in that two or three week window prior to its release.

So the strategy with the series is really more driven around a marketing strategy and a PR strategy than it is necessarily around getting money up front or any of that other stuff that you alluded to.

Okay. That makes sense. Now on the attendees, who are the Met and for some of the other genres, like the Philharmonic, do either you or any of your exhibitor partners do any kind of research to see whether there is cross-over into the core movie business of people who might otherwise not have been prone to coming to see a movie?

Yes, we do all sorts of research on almost every event, some more than others, but the general trend you'll see is something like the Met or the Phil, very upscale, there's a very low cross-over, which is actually a really good thing for the theater operators, because it introduces a whole new audience to the movie theaters. And we do get comments back that people go to the Met and they go into a brand new megaplex and say, wow, I haven't been to a movie theater in 15 years. These seats are comfortable. And, wow, this is a great experience.

And so that whole process of introducing a new audience to the facilities and the actual comfort and experience within those facilities is a huge benefit. And that's one of the reasons, quite honestly, we have focused on the arts as a category that's very important to, not only us, but to the theater circuits as well.

Clearly there's a lot more cross-over once you start to get into types of events like, say, rock concerts or other things, where the demo is much more in line with the core demo of movie goers. So in those situations, you would see a lot of cross-over between the two.

What -- no, but getting back to your point, that it's a more upscale, and probably an older demo, I guess I had assumed that, and I guess what I was really trying to get at is, then after getting that body into the theater and having that person say, hey, movie theaters are much nicer than I remember them, I am wondering if you have any sense of or have done any research on what the retention is afterwards? For those people to come back and see some older [feeling] titles?

The question that we asked that's sort of related, you never really know, right? Because we don't actually do a lot of research on movies to say why are you here? And the most answered question is, I like the movie, okay?

So it's a little hard to tie the two together, but in our research, we do ask questions, like what do you like about it? Will you come back to another event or movie? And the -- the response levels are incredibly high. And for something like the LA Phil, I can tell you we've done a lot of research on it and the response levels are very, very high. As you know, some of the highest we've ever seen on the experience itself.

And much like we grew the franchise -- the Met franchise in the theaters, it takes a lot of repetition and a lot of word of mouth. Because you just don't have the budgets to go out there and pay for, if you will, awareness.

Thank you.

You're welcome.

Our next question comes from the line of James Dix with Wedbush Securities. Please proceed with your questions.

Good afternoon, guys.

Hi.

I've got, I guess, three questions. First, it seems like around 100 years ago, there was a broadcasting cable TV network Upfront, and I was wondering if you could give me a little sense as to how you -- what you thought were the results of that? I mean, it seems like the CPM growth was strong, so I would think that helps you going forward.

On the other hand, the volume sold was relatively high. I'm wondering if there's some risk that that might take some money out of the scatter market? Especially if there's just some increase in macro concerns. So just any color on how -- you could give on kind of the impact of the Upfront on your outlook?

Sure. Clearly the double-digit growth in the CPMs is a good thing for us. Because it brings up the floor.

So we're competing in the television marketplace, so any time the mediums that we're competing against, their CPMs go up, well our CPMs are still higher, significantly higher, in some cases. It does help that the floor has come up. So to your point, that's been very good for us.

The issue of too much money being sucked up in the up front, we had kind of the same issue last year, there was a significant increase in the dollars in the up front. As you say this year, there was a little bit of shifting between broadcast and cable. Cable, for the first time, attracted more money.

I think all of that is good news for the advertising marketplace in general, which is good news for us. Whenever the macro market is doing well, that is good for us.

The other thing I will tell you is that we are bought directly out of some television buying groups. And so to the extent that the upfront money is dedicated, if you will, to television, there's still a chance that some of that overflows to us.

Some of it is going to depend on how the ratings do, actually, through the next year. And as we continue to see the kind of ratings decline in broadcast that you've seen, that could help us, as you get the overflow effect.

I think that's clearly been helping cable, as media buyers have not been able to meet their GRP goals, they've had to shift money to cable, because it's cheaper, and they can then meet their GRP goals because they can buy more GRPs for the same dollar.

So all of those things, I think, directionally, are very positive for us. And I'm very bullish about the advertising marketplace, despite some of the concerns and clearly the market activity today wasn't very pretty.

Right. Okay. That's helpful. And then second one, I guess more of the housekeeping. Of that 81% that's currently, I guess, committed or pending or booked, how much is truly firmly committed? And I guess I ask that in the spirit of people just thinking about the worst case, if the economy really does worse than we expect? Which I know people will be asking CBS on their call, whether any advertisers were out there, exercising their cancellation options already? So I guess that's kind of what's motivating that question.

How did they answer the question?

Yes, well, I guess they said, the options expiration deadline hasn't been hit yet.

Right.

So it wouldn't make any sense to do it early. But they're not hearing of anything substantial at this point.

Yes, we're not hearing it either. And our deadlines usually have much longer lead times than television does, 90, 120 days, generally. And so we've not seen any of that. The only time we ever really see that is when people can't get their creative ready, and that's usually just a delay from one month or one quarter to the next.

As far as the 81%, that's 100% basically committed. It's not 75% for sure. It's none of that. We have a whole other bucket of bookings, or proposals is probably a better way to think about it, that we look at and try to gauge. That is not in the number.

The other thing you have to understand is the 81% is on a much bigger base. And Gary said that and it's a little bit -- sometimes a bit hard to pick up, but the 81%, while it sounds like a lower number, on a dollar value basis, it's actually a higher number. Because the 81%, the denominator in that calculation is a much bigger number than the 83%, which is calculated off last year's actual for the year.

And this year, it's the denominator is calculated, the 81% is calculated, off the midpoint of our range. So -- which is obviously up from last year.

Right.

So, again, it's just one factor we look at.

It's what we say is booked and pending. Booked means it's already contracted, pending means it's verbal, we're just waiting for the contract to show up.

Yes.

In house, but it's already a done deal.

And we --

And it -- sort of Kurt's point, it's 90 to 100 days -- 120 days, typically, on those contracts, but I can't remember the last time anybody's ever --

Yes.

Probably the beginning of the recession, we had two or three, but that seldom ever happens. And then if you've got exclusivity because you bought at 60, those have no cancellation provisions.

Yes, and if you do the math, I mean, you can do the math, but at 120 days, we're already sort of out into October, November. So third quarter there's little -- very little, if any, cancellation flexibility in third quarter right now.

Okay. That's helpful. I guess the final one is maybe a bigger picture one, but I guess I'd -- you would be a good person, Kurt, to comment on it.

Just your thoughts about the likely scenarios for changes in the theatrical windows and the differential impact that that could have on your business as opposed to a theater circuit business?

Because sometimes, I think, rightly or wrongly, well, I guess wrongly, investors sometimes think about secular trends affecting attendance as having kind of the same impact on you, would on a theater circuit. And so just any commentary you can give to that?

Sure.

Because I think with the stuff that's been in the news over the past few months, I think that might be one thing that people think about when they think about your stock.

Yes. Yes. Well, clearly to make a point, I mean the whole thing that went on this spring, over the premium pay-per-view thing that was on DirecTV, as you all have seen, it was -- it turned out to be a non-issue.

The downloads were very small. It had virtually no impact on the theater business, if any. I would say probably none. And I would just make a general comment that I think the studios have every bit as much to lose if they do something that decreases the attendance in movie theaters.

Because there's this double effect that they have where in the -- not only do their revenue share associated with the tickets that are sold in movies go down, but then the marketing value of the movie theater or the marketing asset goes down as well, because there's not as many people there seeing the trailers. And the trailers still, probably, if not number one, clearly in the top two or three marketing strategies for any given feature film there is.

The value, the media value, of those trailers is $2 billion or $3 billion a year and as I've talked about before, the studios don't pay anything for that because it's built into their booking relationship with the studio -- or with the exhibitors.

So it's an incredibly efficient marketing platform for the studios that isn't in any of their P&Ls from a cost standpoint. It's built into the revenue share agreement with the movie theater circuit.

So if they do anything that starts to cannibalize that marketing platform, the value of every window after that decreases as well. So the theatrical impact has a multiplier effect on every single one of their windows.

And so I would tell you that they are as concerned about doing something that would negatively impact the theater window and the theater business as the theater operators are. And so it'll be interesting to see how that all gets resolved. But my sense is, it's not going to get resolved in a way that's going to have a meaningful impact on theater attendance.

Whether or not people continue to make films that people want to see is another issue entirely and that's the issue the industry has always struggled with. I think on a comp basis, we're probably into a positive cycle now. We've been in a negative cycle for several quarters. Second quarter appears to have been a positive, at the start of a positive comp cycle, which probably will last, it looks like, for the next four or so quarters at least. Because the film schedule looks good. We all know that the comps are pretty weak. And so we're pretty bullish about that, as I mentioned before, and so I'm -- like I said, I'm fairly bullish about the business and its long-term prospects, if you will.

Okay. That's great. Thanks very much.

Okay.

Thank you. (Operator Instructions). Our next question comes from the line of Ben Swinburne with Morgan Stanley. Please proceed with your questions.

Hey, guys, it's Ben Swinburne. Good afternoon.

Hello.

Hey, Ben.

Just a couple of questions, one sort of housekeeping on the guidance, and then maybe more strategic.

Kurt, I was wondering if you could talk about the CPG category and how you think they're looking at cinema versus television? You've commented in the past about how that's one category where as you add more circuits and get more of a network nationally, you think there's sort of a step function increase in your sort of addressable ad dollar opportunity there. Just wondering if you could just step back and maybe just tell us where we are on that process? And I have one follow-up, just on the guidance.

Yes, we continue to grow the category. In fact, it's one of our larger growth categories. The question is will we ever be able to be fairly representative, versus television, in the amount of expenditures that these guys put into the marketplace. It's huge, as you know.

Yes.

Just one client, P&G, is an awfully big number. So we continue to work on trying to create strategies from an integration standpoint and from a pricing standpoint, that will attract more of those dollars, so that we can be better represented, say, versus television and the amount of expenditure that goes on in television.

So that's really been the focus. And actually, it's happening. There -- again, our growth in -- percentage growth in CPG is still very good. It's just nowhere near the dollars or nowhere near where it should be relative to the size of that category.

Right. So your percentage from CPG is not indicative of how big of an advertiser they are, on TV [as their side]?

Not even close.

Yes.

Yes.

Is it a big -- is -- are the agencies a big obstacle there?

I don't think it's the agencies, necessarily.

Right.

CPG companies are very tied to research, like media -- mix modeling, models, all sorts of stuff that they've used for decades, maybe even centuries now, to market their products.

And they're very tied to those models. And unfortunately some of those models are not favorable to theaters because we are a high-priced medium. And to put it another way, they do not qualitatively measure GRPs. They only quantitatively measure GRPs. And they are all built around that ROI based on a qualitative -- quantitative measure, rather than qualitative. And we all know not all GRPs are created equally.

Yes.

And we would argue that the quality aspects of cinema are not being fairly reflected in the marketplace, with a lot of clients. Just because they are so tied into these qualitative -- or quantitative models. And so our job is to come up with research that starts to prove that there are quality differences in the GRPs that cinema is providing.

Yes.

And that's what we're working on. And so really, it is -- and rather than just say, okay, we need to lower our price, which is clearly something that we have done off and on. We have airplane-like deals. We have other strategies and structures that we've created to be able to bring down the price a little bit, but the better strategy for us is to prove that the quality of the GRP that they're buying is much better.

Right.

And that's the focus.

It makes sense. And just -- I just wanted to ask about the third quarter guidance on the -- I don't know if this is just your bracketing of the range, but it looks like your assuming just a little bit of margin compression. Is there anything specific there? Or is it just conservatism or timing?

I think most of it is rounding and things like that, to your point.

Yes.

And one part of it is just the fact that we're adding a lot of affiliates. And affiliate margin is a little bit lower. But that's -- I mean, between the two, I mean, it's not all affiliates.

While our margin in the second quarter was a couple of tenths higher than our margin last year, second quarter, it was actually brought down by the fact that our Fathom revenue was a much higher percentage of the total. Our local revenue was a much higher percentage of the total. And the number of affiliate impressions we had was a higher percentage.

So you're going to have those same, at least the last two, I don't know, Fathom, we haven't given any specific guidance on, but we're clearly going to have more affiliate impressions in the third quarter. Now as national advertising really takes off, that has an almost 100% margin benefit. That dollar of national advertising. So it's -- the margins are really sensitive to that mix of revenues.

That makes sense. Okay. Terrific. Thanks.

Yes.

Thank you. Our next question comes from the line of Torin Eastburn with CJS Securities. Please proceed with your questions.

Good evening. Most of my questions have been answered. I just have one. What's your philosophy on share repurchases?

We don't like it very much. We believe that our stock is already constrained a little bit by the lack of float in the marketplace. And obviously a share repurchase would further exacerbate that. So not something that -- we would rather return capital to shareholders by increasing our dividend, which was what we just did.

And it's been sort of the plan from day one and we continue to pretty much every year bring it up. And we will continue to look at that.

All right. Thank you.

Yes.

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for the closing comments.

Well, thank you very much, everyone, for joining the call and thanks for all your support. And I apologize for the lumpy market. Not much I could do about that. Trust me, if I could, I would. And we continue, I think, to deliver and I hope that the market starts to reflect that. So thanks again, everyone, and if anybody ever has any questions, you know where we are. Thank you.

That does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.