National Cinemedia Inc (NCMI) 2013 Q2 法說會逐字稿

Greetings, and welcome to the National CineMedia Second Quarter 2013 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, Mr. David Oddo, Vice President of Finance for National CineMedia. 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 facts communicated during this conference call may constitute forward-looking statements. These forward-looking statements involve risks and uncertainties.

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

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

Thanks, David. Good afternoon, everyone. Welcome and thanks for joining us for our Q2 earnings call. Today I'll provide a brief review of our Q2 2013 results and make some comments about our progress in our key strategic focus areas. David will then provide a little more detail about our Q2 financial results and guidance for Q3 and full-year 2013. And then as always we'll open the line for questions.

The current quarter was a record quarter for us as we once again exceeded the top end of our adjusted OIBDA guidance range with 25% adjusted OIBDA growth on 12% total revenue growth. Our ad revenue grew 15% as both our national and local ad businesses exceeded their internal targets for the second quarter in a row due to the great leadership and hard work by our media sales teams.

The quarter also benefited from a low make-good due to the strong June box office. This strong ad revenue growth combined with tight cost controls, several theatre acquisitions by our founding member circuits and an increase in Fathom margins resulted in a 580 basis point increase in our Q2 2013 adjusted OIBDA margins versus Q2 2012.

Q2 2013 national revenue growth of 16% was driven by a strong 17 percent point increase in inventory utilization and 7% higher network attendance associated with the strong box office and continued addition of network affiliates.

The meaningful increase in utilization reflects our focus on developing unique integrated marketing campaigns for clients and more aggressively pursuing new client categories with more flexible pricing structures designed to shift budgets from lower priced ad mediums.

We have already added 20 new clients in 2013, 11 included in the Q2 2013 revenue, that have never spent with us or have not spent since 2006. These new national clients included businesses in the apparel, restaurant, QSR, toy, print media, computer software, and confectionery categories.

While we are successfully expanding and changing our client mix, as expected, it is putting pressure on CPMs. This combined with lower Q2 2013 content partner spending versus Q2 2012 resulted in a 9% lower average CPM. You should note however, through the first six months our CPMs are only down 1.2%.

Another key part of our strategy to expand inventory utilization is our participation in the TV upfront process. Participation in this process allows us to work with clients to create unique integrated marketing campaign packages and book multiple flights during the planning process that are consistent with our marketing plans for the coming year.

Our Q2 2013 results benefited from several integrated deals and upfront commitments that were put in place during the 2012 process. Given the success of this upfront strategy launched late last year, we held our second upfront presentation on May 15 during TV Upfront Week in New York City. By all measures, this event was a successful event as over 500 clients, media agency and other media executives attended our presentation.

While we're making good progress, it will likely take us several years to increase or advance bookings to our ultimate goal of 70% to 75% of our annual budgets going into the year from just under 60% going into 2013. Having said this, we appear to be trending in the right direction as our Q4 bookings are up nearly 25% and there are several additional deals in discussion.

Our local advertising business posted its third consecutive quarter of strong double-digit revenue growth with Q2 2013 revenue up 16% versus Q2 2012. Our average contract value was up 10% as we continued to expand our regional business and the number of contracts booked increased 6% with the addition of new network affiliates and an increase in spending by smaller businesses that are becoming more comfortable that the economy will improve into the future.

Since the beginning of 2012, we added 16 new network affiliates with 976 screens. While the impact of those additions on our local and regional business took a little longer than we had originally anticipated, with these new theaters fully integrated into our digital network and sales process, we expect to continue to benefit from the increase in DMAs and better geographic coverage across DMAs.

Our local and regional bookings for the second half of 2013 are currently up 9% over 2012 at the same time last year. Having said this, our local revenue comps get more difficult starting in Q4 2013.

While still a small part of our total advertising revenue, our online and mobile initiative continues to be an important part of our integrated bundling strategy that is helping to drive incremental on-screen buys. This integration strategy combined with an 11% increase in Q2 2013 local online sales versus Q2 2012 were the primary drivers of the 25% increase in online and mobile ad revenue versus the first half of 2012.

As part of our overall digital strategy, we continue to aggressively pursue our strategy of connecting on-screen ads to the mobile devices of theater patrons to provide a unique wireless promotional platform for our theater circuit partners and ad clients.

Earlier this summer, we launched our FirstLook Sync app as part of an integration with the Regal's new app. FirstLook Sync is also available in the Apple and Android online stores as a standalone app or as part of our Movie Night Out app that has now been downloaded by approximately 2 million users.

While the usage of this app is still small, the response rates have been significantly higher than market norms. We're hopeful that the distribution of FirstLook Sync will continue to expand as it is integrated with other movie-going apps, including those of our other circuit partners.

As mentioned earlier, our competitive position continues to benefit from our strategy to expand our national digital network. So far in 2013, we have signed four new affiliate theater circuits with approximately 246 screens and 7 million annual attendees as we continue to have promising discussions with several other regional circuits.

As of the end of Q2 2013, we had 19,587 total screens in our network, representing a nearly 3% increase in total screens versus the end of Q2 2012. Our founding members have also been very acquisitive with transactions involving individual theaters, and the Great Escape, Rave and Hollywood theater circuits.

Net of acquired disposition -- required dispositions, our founding members have acquired 109 theaters with 1,437 screens since late 2012. While 97 of these theaters with 1,245 screens were already part of our network and thus do not expand our reach or impression base, the higher-margin theater access fee structure with our founding members will increase our future margins. You should note this benefit is already implicit in our 2013 guidance.

It is also important to note that included in these acquisitions are 192 screens and approximately 9 million attendees that will not be added to our network until their Screenvision contract expires in a few years. We currently expect to receive approximately $3 million of integration payments annually as compensation for the NCM LLC units that have been issued related to those acquired theaters that are not yet part of our advertising network.

We also continue to improve the quality of our network with 97% of our attendants now part of our digital satellite network with approximately 1,500 -- 15,500 screens representing over 80% of our satellite digital network attendance featuring new higher quality digital cinema projectors.

Our Q2 2013 Fathom Events revenue decreased $2.9 million or 33% versus Q2 2012, due primarily to a decrease in the number of consumer events held to 15 from 26 during Q2 2012. Some of this decrease was due to fewer Met events as this season's schedule was more heavily weighted to Q4 2012 and Q1 2013.

The lower revenue was offset by margin improvements related to 2% higher revenue per event and lower programming cost percentages, resulting in only a slight decrease in Fathom's operating income versus Q2 2012.

The Q3 and Q4 Consumer Event pipeline looks very promising with the start of the new Met season, the return of Kirk Cameron, the highly anticipated Mayweather Canelo fight, two comedy events, and a resurgence of classic rock music with Grateful Dead, Bruce Springsteen and Def Leppard concert events.

As we have mentioned in the past, we've been working with our founding member partners to find a more effective long-term ownership and business structure that would allow the Fathom business to attract more high-quality programming and more effectively leverage its national network and let NCM management focus its full attention on our growing and much higher margin core advertising business.

You should note that for the trailing 12 months ending June 2013, our Fathom Consumer business only represented 6.3% and 1.2% of NCM's total revenue and adjusted EBITDA, respectively. Earlier this week, we signed a non-binding letter of intent whereby NCM will contribute its Fathom Consumer business into a newly formed LLC that will be owned 30% by each of our founding member circuits and 10% by NCM LLC.

In addition to the 10% ownership interest, NCM will receive a $25 million six-year 5% note that will be paid in equal annual installments. The note will be guaranteed one-third each by the three founding member circuits. In order to create a smooth transition, we will continue to provide certain operating and corporate overhead services to the new entity for nine months after closing for an agreed upon fee.

Due to the related party nature of this transaction, NCM formed a committee of independent directors, which is being advised by Peter J. Solomon Company. Closing is expected in late Q3 or early Q4 of this year.

Looking ahead, while we continue to work on a number of late Q3 2013 national advertising scatter proposals, consistent with comments on our first quarter call, we're expecting lower Q3 revenue and adjusted OIBDA versus 2012. While our Q3 local and regional ad businesses continue to grow, as expected we will not be able to completely replace the record 20 million Q3 2012 national campaign of one of our telecom advertising clients.

Despite a lower projected Q3 2013 national ad revenue, with first half adjusted OIBDA up over 22% versus 2012, our nine-month adjusted OIBDA implicit in our Q3 guidance range would represents a record first nine months for our Company.

With a shift in our revenue mix from Fathom to our higher-margin advertising business and other margin improvements related to tight cost controls and theatre acquisitions by our founding members, we're keeping our annual guidance unchanged but are increasing our annual adjusted OIBDA guidance slightly.

This annual guidance reflects the robust first half and the increase in late Q3 and Q4 proposal activity versus this time in 2012. While this increased booking activity may relate to a stronger future economic outlook, we may also be benefiting more meaningfully from some favorable media market trends relating to digital programming fragmentation and the proliferation of the DVR and other ad-skipping -- TV ad-skipping technology.

A broadening national reach, an increasing impression base and unique engaging theatre environment where ads can't be skipped make our core selling proposition stronger than ever.

I'll now turn the call over to David, our Interim Co-CFO, to give you some more details concerning our Q2 2013 financial performance and our Q3 2013 annual guidance. David?

Thanks Kurt. For the second quarter our total revenue increased 11.5% versus Q2 2012, driven by a 15.4% increase in total advertising revenue including beverage, partially offset by a 33% decrease in Fathom Events revenue.

Total Q2 2013 adjusted OIBDA increased 24.9% and adjusted OIBDA margin increased 580 basis points to 53.9%, reflecting the increase in our higher-margin advertising revenue to 95% of our total revenue versus 92% in Q2 of 2012. Our margin increase also related to the acquisition by our founding members of a certain of our network affiliates and a resulting shift from the affiliate revenue share cost structure to the higher margin founding member theatre access fee cost structure.

We also recorded $900,000 of AMC Rave and Cinemark Rave integration payments for the second quarter versus none in Q2 2012. You should note that these integration payments are added to adjusted OIBDA for debt compliance purposes but are not included in our reported revenue and adjusted OIBDA as they are recorded as a reduction to net intangible assets on our balance sheet.

Our Q2 2013 advertising revenue mix remained consistent with Q2 2012 and was 71% national, 19% local and 10% beverage. Q2 2013 national ad revenue, excluding beverage, increased 16% and reflected an increase in utilization to 107.1% compared to 90.3% in 2012 and a 7% increase in our Q2 2013 attendance versus Q2 2012 related to the stronger slate of films versus the second quarter of 2012 and the continued addition of new network affiliates.

In addition to the changes in client mix as Kurt discussed, the 9.1% decrease in average CPM was also affected by a 7% decrease in Q2 2013 content partner spending allocations versus Q2 2012. The strong box office for the last few weeks of the quarter resulted in a $500,000 make-good from $800,000 at the end of Q1 2013.

You should note that this make-good was one of our lowest quarter end balances and lower than the Q2 2012 balance of $1.4 million. Our Q2 2013 local revenue increased 16.1% with same screen sales increasing approximately 14.7%. This was driven by an across-the-board increase in the volume of both larger regional clients and smaller local contracts.

The total dollar value of contracts under $100,000 increased 15.2% and a number of these smaller contracts increased 10% while the total dollar value of contracts over $100,000, increased 19.6% and a number of these larger contracts increased 30.4%.

Looking briefly at diluted earnings per share for the second quarter. We reported GAAP EPS of $0.17, compared to a net loss of $0.03 in Q2 2012. Excluding charges for derivative related items, swap terminations and write-off of debt issuance costs, EPS would have increased 46% to $0.19, compared to $0.13 in Q2 2012.

Our capital expenditures were $3.5 million or 3% of total revenue for the second quarter, compared to $2.5 million or 2% of total revenue in Q2 2012. The increase was primarily due to a capital lease funded by the provider of monster video walls installed in 11 theater lobbies in the top 10 markets and the timing of connecting new affiliate screens to our digital network.

We currently estimate that 2013 CapEx will be in the range of $11 million to $13 million or approximately 3% of total annual revenue. While there are ongoing discussions with several regional circuits that could increase our future impression base, our current capital expenditure projection assumes that no additional network affiliate agreements are signed this year.

Moving on to our balance sheet. Our total debt outstanding at the end of Q2 2013 increased to $884 million from $839 million at the end of Q2 2012, primarily due to increasing our term loan by $45 million to fund approximately $23 million in swap termination payments and add approximately $13 million of cash to our balance sheet.

The increase to our term loan was a result of a November 2012 refinancing, as well as a May 2013 repricing. Both transactions allowed us to capitalize on favorable debt market conditions that lowered our projected 2013 annual cash interest expense by approximately $5 million.

Our revolver balance, net of NCM LLC cash, was approximately $5 million at the end of Q2 2013, down slightly from approximately $6 million at the end of Q2 2012. Our current average interest rate on all debt is approximately 5.5%, including our $270 million floating-rate term loan bank debt at approximately 3%. Our total debt outstanding is approximately 70% fixed.

Our consolidated cash and investment balances at the end of Q2 2013 increased by approximately $20 million to $95 million from the end of Q2 2012 and include an NCM LLC balance of $9 million. Approximately $20 million of the $86 million of cash held by NCM, Inc. is reserved for income tax payments and tax receivable agreement payments to the founding members.

Thus excluding these tax associated reserves and after the payment of the $0.22 per share dividend that we announced this afternoon, we would be able to pay approximately five additional quarters of dividends even if no cash were distributed up to NCM, Inc. from NCM LLC.

Our Q2 2013 dividend that would be paid on August 29, 2013 to shareholders of record on August 15, 2013 represents an annual yield of approximately 5% based on yesterday's closing share price.

Our pro forma net senior secured leverage at NCM LLC, as of June 27, 2013, was approximately 2.9 times trailing four-quarter adjusted OIBDA, down from three times as of March 28, 2013, which is well below our senior secured leverage maintenance covenant of 6.5 times.

You should also note that while we have no NCM LLC total leverage or NCM, Inc. consolidated maintenance covenant, our total net leverage at NCM LLC was approximately 3.7 times, down from 3.9 times as of March 28, 2013. And our consolidated leverage, net of NCM, Inc. cash balances, was 3.4 times, down from 3.5 times as of March 28, 2013.

Turning to our Q3 2013 guidance and annual outlook. For the third quarter, we expect total revenue to be in the range of $130 million to $138 million and adjusted OIBDA to be in the range of $73 million to $81 million. This implies an adjusted OIBDA decline of approximately $4 million to $12 million or 5% to 14% versus Q3 2012, primarily due to the record telecom campaign in Q3 2012.

Even with this expected Q3 2013 decline, the projected first nine months total revenue and adjusted OIBDA implicit in the midpoint of our guidance will represent 2% and 6% growth, respectively over the first nine months of 2012.

With respect to our annual bookings and outlook, our booked and pending national advertising revenue, including content partner, beverage, cell phone, PSA and scatter contracts, are up approximately 3% or $8 million on a total dollar basis, and are 87% of the national advertising revenue implicit in the midpoint of our full year guidance range versus 88% of our actual 2012 national advertising revenue at the same time last year.

While it is still early in the fourth quarter sales process, our Q4 2013 national bookings are currently up 24% and we are hopeful that our upfront strategy and a more stable economic environment will provide a more favorable late Q3 and Q4 2013 selling climate than in the past two years.

With these bookings and a strong first half that offset the weaker Q3 2013, as Kurt mentioned, we are leaving our annual revenue guidance at $455 million to $465 million, but increasing our annual adjusted OIBDA guidance to $230 million to $240 million.

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

(Operator Instructions) Townsend Buckles, JPMorgan.

Thanks. Kurt, can you talk about the extent to which the strong pickup and demand you saw at the end of the second quarter has continued into the third? And it sounds like the bookings later in the year are looking stronger. So if you could talk a bit more about the visibility you have into the quarter here and Q4 where you've been hit by pullbacks in the past -- sorry, I think around September and October, so I was just wondering if you feel any better at this point in the year than years passed?

Yes, we clearly feel better about that. I think the overall economy just feels better. As you recall the last two years the real issue started about now. So, 2011 August was a very difficult month for the market, which continued into September and October. And I think the issues of last year related to the election and the fiscal cliff.

A lot of that noise is no longer there. So when you look at other factors in the economy, the unemployment rate seems to be -- the whole employment issue seems to be better, housing seems to be a lot stronger. There's just a lot of factors that I think give me a lot more confidence that things are going to hold together this year throughout the rest of the year.

Clearly, we've allowed ourselves in downside in case it doesn't, but I am feeling comfortable. As far as the timing of bookings, clearly the late second quarter rush, we'll never know exactly why it was, but some of the things that we think may have gone on, there may have been some money hung up related to the upfront process, maybe advertisers really started to think seriously about moving money away from TV because of the rating declines that they were experiencing, you don't really know.

We're kind of seeing some of the same stuff happening now. Late third quarter seems to be a lot stronger than we saw earlier in the third quarter and so we've got a lot of later deals come in and we're starting to see a lot of activity for Q4. As David mentioned, our bookings are up.

Now, some of the Q4 relates to some deals that slipped from Q3 to Q4. So that's some of the answer for why Q3 is a little softer than we would have liked, but we still would have been behind last year almost no matter what, as David said, the big deal last year we had with one of our telecom clients. So I think the environment just feels better right now.

And can you remind us how much content partner spending you have in the third and fourth quarter versus last year?

Do we even talk about that? I know we had 7% less in the second quarter. As far as the first half versus second half, I don't think there is that much of a difference year-over-year.

Okay.

Remember I think we said our first quarter was up in content partner spending, our second quarter is down a little bit, and I think second half pretty stable.

Right. And just --.

Go ahead.

Yes, just lastly David if you could quantify how much the founding member acquisitions increased the margins in the quarter?

Increased from what? Last year?

Yes, year-over-year.

That's something we don't have handy. But I can tell you on an annual basis, the Rave acquisition by Cinemark is about a little less than $4 million on an annual basis for us, EBITDA, and Great Escape is about $1 million, and Hollywood about $2 million and all on an annual basis. So and I guess if you parse that up quarter reach and do the math, it's a little bit of an increase.

Great, thanks guys.

James Marsh, Piper Jaffray.

Hey, guys. This is [Stan] on behalf of James. Recently seen some shift in Apple's marketing strategy, do you expect any push from Apple or Google this fall to offset last year's Samsung handsets, and have you seen anything, any activity there? Thanks.

Yes. That's about all I can say right now.

Is it -- can you quantify in anyway? Is it meaningful now for --?

No. Probably best I don't quantify at this point.

Okay. And then secondly on Cobb Theaters, I think it's up for renewal second half with Screenvision. Is it strategically important to you guys or just let it slip here?

I don't anticipate we're going to lose any affiliates. So I think that's the bottom line.

Okay. Kurt, thanks.

Yes.

Barton Crockett, Lazard Capital Markets.

Okay. Thanks for taking the question. I just wanted to clarify one thing on your guidance. Does your guidance exclude Fathom revenues in the second half with its divestiture now planned?

No. We haven't made any adjustments for Fathom at this point. The comments we made on Fathom is because we're a little bit below our revenue targets in Fathom for the year-to-date and through third quarter. So the mix obviously changes our margins a little bit.

Okay. All right. So when would you expect this transaction actually hit the P&L (multiple speakers).

I think if everything goes according to plan, we'll hopefully get it closed at right at the end of the third quarter so they'll only impact fourth quarter.

Okay. All right. And then in terms of the revenue outlook here, I was wondering if you could give us some sense of in the middle of your guidance range in the fourth quarter, what are you feeling in terms of ad revenue growth year-to-year and how dependent is that on box and attendance given that we do have a tough comp in the fourth quarter?

Yes, I don't really -- our business is not all that tied to the box office per se. Obviously, our make-good could fluctuate from the low of $0.5 million into a high, I think, we've ever had of $4 million. So clearly there's a range of $2 million or $3 million of revenue that could shift from one quarter to the other because of box office declines.

But even that's only related to the box office at the -- right at the end of the quarter. So it's -- we're most sensitive to declines in the last two or three weeks of a quarter. Does -- if it happens any other time, we can usually make good inside the quarter and so it doesn't impact our quarterly results.

Well, can you give me a sense of the level of ad change year-to-year you're thinking in the fourth quarter based on your guidance?

I'm trying to figure out by backing into it, because obviously we haven't given fourth quarter guidance yet.

Yes.

So you can back into the numbers just by taking our third quarter guidance, and subtracting --.

[The total numbers], but there is some volatility in Fathom as well?

Yes, I wouldn't worry about Fathom all that much especially from a bottom line. It's not a big bottom line generator for us. So it's less than $1 million a quarter.

Yes, okay.

So I wouldn't worry about that much. Clearly, if we end up closing the Fathom transaction by the end of the third quarter, fourth quarter margins will be positively impacted. The Fathom business over an annual period, without it, our margins would be about 2.5 percentage points higher.

Okay. Well, I mean just one final thing on this Fathom thing. I mean, in this transaction, is there any lessening of the strategic relationship with Fathom and I thought that was one of the things you offer to your theatre partners is it's the relationship with Fathom that they find attractive. Putting them into a separate entity, does that lessen it anyway or change it anyway?

I don't think it lessens in anyway. And the big thing that we've been pushing and we'll continue to push is the idea of trying to create sponsorship sales around events. And that is going to continue to go forward.

So, the strategic benefits were synergistic from an expense standpoint, use of the network, all of those things will continue into the future. The business is more of a consumer business where clearly our core ad business is a B2B business. So, there's not really on the sales or revenue side, there aren't any real synergies. It's more on the expense and distribution side.

Okay, great. Thank you.

You bet.

Eric Handler, MKM Partners.

Yes. Thanks for taking my questions. So, when I look at your OIBDA margin of 53.9% on adjusted EBITDA basis, it's the best in seven years that you've had in the second quarter. So how much of this improvement or tightening of your costs that you've done is permanent versus temporary? And second of all, just your thoughts Kurt with -- it looks like the broadcast network upfronts pretty much finished now, volumes are down and I'm just curious your thoughts on how that might impact you as you sort of get into the fall?

Yeah, I'll answer the second one first Eric. The volumes being down and the TV upfront is always a good thing for us. And I think, clearly their CPMs are up anywhere from low to mid-single digits, so clearly, their volume being down as a relation to the decrease in ratings.

So, anytime there is less video ratings out there in [TV Land] has got to be a good thing for us, because advertisers have got to look elsewhere for those rating points. Now, clearly some of that is moving to the online video and other social and digital stuff.

But I think that provides a good environment for us. It's clearly a better place to be in when all the money is being sucked by the TV upfronts right? So, the first part of your question, remind me, what?

Of your cost cuts or cost leveraging, how much is permanent versus temporary?

There are three things really going on here. The first is probably the most significant and if you look at record revenue for the first quarter or second quarter rather, the flow through as you know on our local and most importantly on our national business is very, very high.

So, just the implicit nature of the high margin incremental revenue that we have is driving most of that margin improvement. We have some cost containment. We obviously haven't had a CFO for a few months, so that's helped, and there has been a few other things that we've done, and then of course, as David mentioned, the change in some of the theatres that were acquired by the founding member circuits.

While second quarter didn't have all that benefit, it had a lot of it in it and that's another contributing factor for us.

Great, thank you.

You bet.

James Dix, Wedbush Securities.

Thanks very much. I guess I have a kind of a broader question now that you're going through your second upfront process and I assume broadening your reach to different categories of advertisers, how are you thinking about pricing going forward and the need to kind of appeal to advertisers who maybe more CPM sensitive when it comes to any of their sight, sound and motion budget. Is this some kind of changing or evolving strategy here that we should be thinking about in terms of that CPM growth because I know you've indicated that's not going to be a driver kind of for the near term, I'm just wondering if you are thinking that maybe that's going to be off the tables or driver over -- for a little bit longer than that just as you evolve your strategy to reach out to other categories to drive your demand. Thanks.

Yes. I think the answer is different depending on what period of the year you're talking about. Clearly, the month of May through almost September, but August for sure November, December, those months, we clearly have a lot less flexibility. And those are sort of -- the use a TV analogy, our prime months, if you will, and -- or prime time months. And then the rest of the months, obviously, we have a lot more inventory availability, and we have a lot more flexibility.

The good news about our upfront strategy is that we can sit down with clients and talk about those type of things across their whole marketing plan for the year. And you can do multiple flight deals where your CPMs for certain flights in the summer and the higher months around Thanksgiving and Christmas are higher, in the rest of the year it's lower, and maybe the weighted average CPM works for them.

So there's no question, and we've said this before. So it's not a new strategy we're announcing today. There's no question that we are being a lot more creative and a lot more flexible with our pricing depending on what flights are being bought and what the deals are. So I don't think that's a new strategy.

We've been employing that and it seems to be working. Obviously, this is about driving utilization higher. And as I've said many, many times, given that we're in the media business, you can't really get too aggressive on pricing until you're sold out. And that's something that I think is true with every media business.

Great. And I just have one follow-up. You discussed a little bit more, but as you're looking into the back half of the year, and you're talking about the improved tone you are sensing in the ad market, any sense of that is -- that improvement is more in the national side than the local or the other way around. Just curious as to what your take is on that?

Yes, I'd say it's in both. There's no question that our expansion has helped us on the local and especially regional side. Some of the data that David shared with you on the amount of dollar value of contracts over a 100 grand, is -- that growth is obviously much higher so that would point towards our regional business doing better.

And I think that is related to our better demographic or geographic rather coverage in certain DMAs, but I do think we're also seeing smaller businesses come online and there's more businesses out there. We went through a period of time from 2007 to 2012 where net business additions was actually negative.

So there were more businesses going out of business than they were being formed. And so we're seeing that reverse now where there is more businesses being formed, thus we have more clients to call on.

So all of those things, I think, are helping our -- our local businesses had a heck of a run. We've got three quarters in a row now where we've been 15% to 20% growth. I do -- we do expect those growth percentages to slow a bit as the comps become harder. I mentioned fourth quarter last year was pretty strong for the ad business, but it still looks like it's the local ad business, so still looks like it's growing.

The national business that we've talked about a lot, we are very sensitive to changes in the broader environment -- the economic environment because as CMOs and other marketers start looking at their sales levels for their individual companies going forward, if they start getting nervous about economic growth and just the viability of the economy in general, we're going to start cutting back their marketing, and we're amongst the marketing mix that tends to go first.

And that's why you've seen us have more challenging fourth quarters the last couple of years because as the year moved on, the economic outlook started to go down. And cratered right about now or maybe a little more into August and then in September.

So we're seeing right now and the activity we're seeing would seem to indicate everybody has a high level of confidence that it will -- the good news will end -- continue into the year -- into the end of the year.

Great. Sounds good. Thanks very much, Kurt.

Ben Mogil, Stifel.

Hi guys, good afternoon. Thanks for taking my question. David, on the numbers that you gave for Great Escape, Hollywood, Rave, I think it was like $8 million or $9 million of EBITDA. Is that for '13 or is that a full run rate as if -- from a Jan 1 perspective?

That's the full year, and it's a little less than $7 million. Rave Cinemark were little less than $4 million, Hollywood about $2 million, and Great Escape about $1 million on a full year basis.

Okay, that's great. And then, Kurt, I apologize if you sort of talked a little bit more about this, I got disconnected. When you were talking about the Fathom transaction, beyond, I think, you were sort of tracking both the metrics that were sort of (inaudible) was the decision to exit Fathom related to -- it was a business that had no kind of core with the core advertising business? Was it being -- was it your impetus, was it the founding members who obviously can use this from a ticketing perspective -- curious sort of what drove the Fathom decision and obviously earlier this year you actually -- part of (inaudible) kind of curious what was going on that front?

Yes, I think the consumer business clearly was a business that we had a lot of hope in. It's been a good business. It's grown a lot over the last several years and I think we guided to a point where the ownership structure that we had in place and the alignment between their interests and our interests probably weren't properly matched with trying to get the business to the next level and try to reach its full potential.

And clearly this is a business that if you get the full support and you get the full pressure from a marketing standpoint and from other standpoints, from the circuits, it's a business that can flourish.

If it's a business that they don't have a big economic interest in then it's going to be tougher. And I think the structure that we've created, they obviously have a much bigger economic interest in it. We're going to continue to do for quite some time, I believe, continue to do the services where our synergies can be created and other things that we can do for the business that are important.

So, some of the synergy benefit that's always been there is probably not going to go away, and I just think it's a better platform for this business to flourish and if you look at it from NCM standpoint, I gave you some statistics you know, so far this year it's been a little over 1% of our cash flow.

You have to sort of sort ask yourself, is this a business that from a focus standpoint, is in the right place and so that I think was probably more of a secondary reason to do it but a reason nonetheless.

That's great, thanks guys.

Jim Goss, Barrington Research.

Thanks. Kurt I was wondering if you could talk a little bit more about the upfront process in terms of just how the negotiations go with the individual advertisers. Are you laying out a full year in terms of replacement of spots, certain days of the week, certain times, certain genres like -- and how does the mix of movies impact that and are there cancellations? Is it -- and maybe sort of a corollary, I presume there are some sort of impact on the -- of the upfront guarantees on rates in return for the stability you get in return. So if you could talk about that a little bit that would be of interest.

No deal is the same. So, any comments I make obviously are very general I think. Clearly, the approach is meant to try to match our avails or our availability -- inventory availability with what their needs are. And clearly, if they have needs during places where we have low inventory utilization, there's going to be a much easier price discussion with that client.

If somebody comes to us and says, they just need inventory in July and August, obviously that's going to have a different pricing dynamic. So, I can't make any general comments about that, but clearly you have to give them a reason to commit their money upfront and you know I would say the big reason is for people who are launching products to make sure they get the inventory that they needed when their product is being launched, I think that's a big incentive.

We also have the opportunity to sit down with clients and create what I've referred to in my comments as integrated programs, programs that not only use the big screen but may use our online stuff, may use some of the lobby stuff.

The more complicated integrated programs are easier to talk about in an upfront environment than they are in a scatter environment where the lead times are much shorter and there's really not enough time to try to put some of these integrated deals together.

So, I think there's a combination of all of those various things Jim that are baked into the strategy and that's why we're doing it. Clearly at the end of the day if we can get more money on the books earlier, that provides less volatility in our future revenue flow and so on, but I think every negotiation/discussion is a little bit different.

Okay and ultimately if you -- the objective is to build enough demand so that you can put pressure on prices, and part of it then is getting additional ad categories involved, and have you seen more of a movement on that. I think it came up in one of the prior questions, but does it seem like that's starting to turn your way in terms of getting the additional categories you need or at least one?

Yes, I mean so far this year, as I mentioned, we've added 20 new clients. That's a pretty good rate for us and 11 new clients just in the second quarter spend. So I'm very happy with the progress we're making there.

Having said that, there are still hundreds of brands out there that still don't buy cinema at all or is at least as much as I would like them to. So there's a lot of fertile ground out there.

Okay. And lastly, do you think local pricing would ever shift to the national style of CPMs versus spots or some hybrid based on when the time slots are? Are you happy with the way they have served to different categories?

Yes, the way we've designed our program with the local ads falling a little bit further away from showtime and the national ads clearly we're better off to keep the structure where we are.

Having said that, especially with the regional deals that are done by local or even national agencies, they're doing the math too and -- but I wouldn't say that our relationship between national pricing and local pricing is much different than the difference between buying a national network campaign or going into the spot market and just trying to buy individual DMAs, there is a premium for buying on a more targeted DMA basis in the TV business just like there is in our business.

Okay, does -- I guess one more, does the move that some theatre chains have made toward having prearranged seats help you or hurt you ultimately?

Well, it actually could go both ways. I can tell you, first of all though, the percentage of seats or shows or attendance that are now doing advanced ticketing, advanced seating, is very small relative to the overall population. So it's not an issue that we really worry about all that much just because the numbers are so small.

Having said that, it is a trend and especially in some of the big cities, LA, in particular, where some of the theaters have started to do it. I can tell you the circuits do struggle with the fact that it hangs people up more at the box office, people take longer to pick their seats and all that kind of stuff. It does delay people in getting to the concession stand, which is not a good thing. So -- and in a lot of cases, there's incremental cost associated with ushers and other people that are going to help people find their seats.

So there are incremental operating costs and other issues associated with it that are not necessarily beneficial to the theater operator. I think where you've seen this most prevalent is in the big cities, LA in particular, where the audience make-up there just requires it. And so you've seen circuits go about that.

The other trend is that a lot of the reserved seating locations are also accompanied by a bigger food menu and in some cases, full sit-down dinner type of things. Well, we've seen in some cases people get in their seats actually earlier for those kind of situations because they want to order those stuff and they want to get it before the movie starts and not have waiters up in front of them and so on.

So it can go either way. I think the bottom line is it's a still very, very, very small part of the overall business.

Okay, thanks very much.

(Operator Instructions) Eric Wold, B Riley & Company.

Two questions. I guess, one, just -- I know the 10-Q will be out either later today or tomorrow, but looking at the balance sheet data in the quarter -- in the press release, what was the major driver for kind of total assets going up $120 million sequentially?

When the circuits go out and buy new -- buy theaters, we give them, as you know, from the structure, new LLC units. So the balance sheet side of that is an intangible. It's valued at the market value of those LLC units when they're issued.

Okay. And then secondly, you mentioned the 20 new clients added year-to-date, 11 in the second quarter. Can you give us a sense -- if you look back to last year of the new clients that were kind of added last year, either in the first half or full year, kind of what was the repeat business for them kind of moving into this year, kind of dip their toe in the water last year? You became repeat customers in 2013 so far?

Yes. I don't know the exact repeat. I can tell you who the customers or the categories rather were in the second quarter of this year. You can call us later, we can talk to you about some of the repeat stuff.

I can tell you, generally, we very seldom have people almost never buy us, hate us and leave. Most of the on-and-off again buying habit is really built around the product launches. So if a company has a product launch in the first year, they advertise with us. The next year, they don't have a launch, they don't advertise with us, the following year, they do.

So it's based more on their product launch schedules than anything. The categories that we saw in the second quarter that were very strong, the telecom hardware and software categories were very strong. The military came back. We did a big campaign for the Army National Guard around the Man of Steel film. Computer software, department stores, import auto were all pretty strong categories in the second quarter.

Perfect. I appreciate it thank you.

Mike Hickey, Benchmark Company.

Hey, Kurt. Thanks for taking my questions. Just kind of thinking forward here a little bit. There is a few kind of emerging technology trends that are interesting, and how it impacts linear television. You have intel coming out of the DVR that theoretically -- they are saying could record every hour that's broadcasted. At Google, that just came out with Comcast. ComCast gives (inaudible) TV. And you have NetFlix and all the Internet TV that continues to get a pretty strong demand and, really, fueling I think the core cutting trend. And I think you've always referred to it as kind of negative vices that are kind of shaking the foundation of traditional TV advertising. So just, theoretically, I mean, how close do you think we're getting to a point where the TV ad buyers are going to have forced accountability to look outside this traditional vertical for avenues like yourself?

Well, look. I'm not going to suggest that TV is ever going away because TV is still the only sight-sound-and-motion platform that's ubiquitous. So even if you want to make an argument that a certain percentage or maybe it's a high percentage of the ads aren't being seen, even then, it's still the biggest reach you can get on a Thursday night or whatever night you're talking about.

So you have to be a little careful even though I think it is true that there's a lot of time shifting and ad skipping and all that kind of stuff going on. TV is still a very, very strong force and still a primary medium for most people that are advertising.

Having said that, there's clearly a lot of things going on in television. All things that you mentioned and a few more that are, I think, giving some ad buyers pause. You also have a lot going on right now with research. And there's a lot of money moving to online and mobile in particular and there's very little research to support the LOI -- the ROIs, rather, or any of the sort of metrics that people like before they start spending a lot of money.

There seems to be a lot of money right now moving into social and mobile, and so on without a lot of data, a lot of research behind it. And TV still has it's research and it still has a currency that is very well respected and very well received and used.

Online and mobile is a long way from there and there's an awful lot of confusion going on in the marketplace right now around research. And so while the technology you mentioned is all very interesting stuff, there's going to have to be research that's going to -- have to come along with it before you really see the money start moving from an established medium like television.

Having said all that, I don't think we, the cinema business, and we, in particular, get enough credit for the fact that we have such a high sampling rate, if you will, of our attendance base. I mean, we, because we have relationships with all these circuits, know the attendance -- the actual attendance numbers. There's no extrapolation and the only thing we have to really calculate is how many of the people who have bought tickets for a given show are actually in their seats when the ads played.

And then we've got other research that, I think, makes people comfortable they can get their handle on that. Most every other medium, there are significant extrapolations that are being made. On the Internet, they're huge. And even TV, you have, what, 30,000 or 35,000 homes across 110 million.

So the sampling size is pretty small. So I think both those trends, the technology, hardware, software trends that you mentioned or alluded to, along with the trends in research are going to be the things that everybody should watch because it's changing very rapidly and it's very interesting.

Thank you. That's a great answer. One quick follow-up. At your upfront this year, you showed kind of how cinema and TV can work together. And that was kind of unique from the prior year, and I think it was pretty effective, at least, with the media buyers that we've talked to. Is there -- but thinking about how hot mobile is, and you're right, there's a lot of research that needs to be done and proven, but certainly people putting money there. Is there sort of a strategic partnerships that you can create or have created that can kind of work both the high and low, the high being you guys and low end being mobile, in terms of kind of extending your kind of aggregate reach between the two, and maybe averaging your CPM lower?

Yes, we announced some deals at our upfront, Twitter in particular, in the social world, that we're working on. And there are two or three other, what I would consider more pure mobile/social things that we're working on.

Clearly, creating these kind of strategic alignments, relationships, whatever you want to call them, is a part of our strategy. Very difficult to get into these businesses now because they're very fragmented and some of the big players are very big.

So, I think, it's a lot better course of action for us to create these strategic relationships where we can take some of our attributes combine it with theirs, and make a one plus one equals three situation.

Awesome. Thanks Kurt.

You bet.

Thank you. We have no other questions in queue at this time. I'd like to turn the floor back over to Mr. Hall for any additional remarks.

Thank you very much, everyone, for joining and for your support. And I'm sure we'll be talking to some of you after this call. If anyone has any questions, please let us know and we'll be talking to you at the end of third quarter. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time here. Thank you for your participation.