National Cinemedia Inc (NCMI) 2014 Q1 法說會逐字稿

Greetings ladies and gentlemen, and welcome to the National CineMedia Incorporated first-quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. David Oddo.

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 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 companies filings with the SEC. All forward-looking statements are expressly qualified in their entirety by such factors.

Further, our discussion today includes some non-GAAP measures. In accordance with Regulation G, we have reconciled these amounts back to the closest GAAP-basis measurement. These reconciliations can be found at the end of today's earnings release, which may be found on the Investor page of our website at www.NCM.com.

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

Thanks, David. Good afternoon, everyone. Welcome, and thanks for joining us for our 2014 Q1 earnings conference call.

Today, I will provide a brief overview of our Q1 actual results and progress against our longer-term operating strategy. I will also comment on the signing of a merger agreement with ScreenVision. David will then provide a more detailed discussion of our financial performance for Q1 and provide some more details regarding our guidance for Q2 and some information on full year. And then, as always, we will open the line for questions.

Our Q1 revenue and adjusted OIBDA finished a little stronger than anticipated, driven primarily by stronger local and regional advertising revenue growth, offset by slightly lower than projected national advertising revenue. Excluding the Fathom Events business that was sold at the end of 2013, total Q1 revenue decreased 5% and adjusted OIBDA declined 18% versus Q1 2013, due primarily to the lower higher-margin national revenue that more than offset higher local and regional revenue and the benefit of tight cost control.

Our Q1 national revenue, excluding beverage, decline of 17% reflects a 10% decrease in our average CPM and a 13 percentage point decrease in inventory utilization that was offset somewhat by 8% higher network attendance related to the strong box office compared to 2013. Despite these current quarter declines, we continue to make good progress toward expanding our business as we added 6 new national clients -- (inaudible) -- during the quarter and have added 18 so far this year, ahead of the 2013 pace, when we added 30 new clients during the whole year. These new client additions and increased spending by some of the existing clients did not upset the shift to later in the year of approximately $3 million in content partner commitments versus Q1 2013.

In addition, the early 2014 TV scatter market has been soft, as an increasing portion of marketing budgets appear to be focused on high-quality sports programming including the best-ever-sold winter Olympics, a NCAA tournament that includes the broadcast of more games. New national client additions so far this year included businesses in the nonprofit, pharmaceutical, Internet, personal care, video game, QSR, family restaurant, toy, home furnishing, and cable TV categories.

Our local advertising business had a record Q1 as revenue increased 36% over a strong Q1 2013 that had increased 22% over Q1 2012. This growth was driven by increased spending from both larger regional and smaller local clients who have benefited from the steadily improving economy.

Our local and regional business is also benefiting from the continued expansion of our network, as better geographic coverage within DMAs helps us compete more effectively with local TV, newspapers, radio, and billboards. We also launched our Turbo initiative that reduces our proposal to on-screen lead times to less than 72 hours; and a very successful sales promotion launched in Q4 carried over into the current quarter.

While the turbo initiative was only tested in Southern California, early results have been encouraging as we are beginning to attract clients that would have never considered cinema in the past, due to their need to change copy frequently or launch new sales campaigns on short notice. We are planning to expand this program to other parts of the country throughout the year, so that by early 2015 we will be able to offer this service to all of our national clients, which could help to expand our business in several underpenetrated categories, most notably retailers and QSRs.

With online and mobile campaigns becoming an increasingly important part of brand marketing budgets, we continue to aggressively pursue our strategy of connecting our big screens with the online and mobile worlds. While our FirstLook sync app initiative is still very small, its capability to quickly and seamlessly connect movie patrons to FirstLook content has yielded impressive response rates that have attracted the attention of larger app platforms. Stay tuned for an announcement of our upcoming upfront presentation in New York on May 14.

The ongoing expansion and improvement of our national digital network continued to improve our competitive positioning across our national, regional, and local ad businesses. We have just passed 20,000 total screens in our network, representing nearly a 3% increase in total screens versus the end of 2013. During 2013 and so far in 2014, we have signed 7 new affiliate theater circuits, with 303 screenings and over 8 million annual attendees. Our founding members and existing affiliates have also been expanding their circuits through acquisitions and new construction.

In addition to the founding member Rave and Hollywood acquisitions last year, Southern Theaters, one of our largest network affiliates, acquired a circuit with 130 screens with over 4 million annual attendees that will join our network this coming July. While the acquisitions by our founding members were primarily of existing network affiliate theaters and thus did not expand our network meaningfully, they did help to improve our operating margins due to the shift from the affiliate revenue structure to our founding member theater access fee structure.

We also continue to improve the quality of our network, with 100% of our network screens now featuring a digital projector, 80% of which are the higher quality digital cinema projectors. Theaters representing over 97% of our network attendance received the First Look programming over our digital network, with the remaining approximately 800 screens, primarily in smaller markets, receiving content via a thumb drive.

Looking ahead for the rest of the year, we are providing cautious Q2 guidance, as there is only five or six weeks of effective selling time for the quarter, and we are discontinuing our 2014 annual guidance due to the uncertainty associated with the timing and impact that the ScreenVision transaction will have on our results for the remainder of the year.

While our Q4 national commitments are tracking ahead of Q4 2013, and despite a recent pickup in Q2 bookings, Q3 national aggregate commitments are down versus 2013, as buyers appear to be lining their commitments as they position for the upcoming TV upfronts. Our local and regional business is also a little soft in Q2 as it appears that many clients accelerated spending in Q1 in response to our sales promotion. Even with a softer Q2, our first-half local and regional revenue is still projected to be up 11% over 2013, and second half bookings are currently pacing higher than last year.

While it is still too early to predict revenue for the second half [end] year, we are working on many significant marketing campaigns and upfront deals that, if completed, would fall into Q3 or Q4. We will know more as the TV upfront process gets underway over the next two months. Our upfront meetings have been going very well, heading up to our upfront presentation in New York on May 14. We are receiving a positive response to our more flexible pricing and seasonal packaging structure and improved audience targeting tools that we are working on.

We're also receiving interest in many of the strategic relationships we have created, including our new relationship with Twitter. And of course, we could also get some positive markup momentum from our announcement earlier today about the signing of a merger agreement with ScreenVision that could create some increased market visibility and positive sales momentum prior to the completion of the deal.

We're obviously very excited about the $375 million merger agreement with ScreenVision. With a projected $32 million of trailing 12-month adjusted OIBDA as of April 2014, and projected operating synergies of approximately $30 million, the acquisition is significantly accretive versus our current trading multiple of approximately of 12.3 times adjusted OIBDA. The transaction will be funded through the issuance of approximately 9.9 million NCMI shares and approximately $225 million of debt, plus deal costs, resulting in slightly lower consolidated financial leverage after operating expense synergies.

In addition to all the financial benefits, this deal will also significantly improve our competitive positioning within the expanding and increasingly competitive video advertising marketplace that now includes hundreds of TV and digital out-of-home networks as well as many fast-growing online and mobile video and social platforms. With meaningful operating cost synergies, better future revenue growth profile, and slightly lower financial leverage, we plan to make investments to integrate the ScreenVision theaters into our existing digital network so that a more targeted and higher-quality preshow presentation can be consistently delivered to theater patrons across the country.

We now reach nearly all 210 US DMAs with ScreenVision added to our network, providing a new national marketing option for retailers, QSRs, restaurant chains, and other national brands who need ubiquitous US marketing to cover all of their locations. While many clients have bought both NCM and ScreenVision in the past, that process has been cumbersome due to the different network technologies, preshow placement, and differing proposal and posting processes.

The addition of the ScreenVision inventory to our new proposal and inventory management system launched in Q1, and additional functionality planned for launch earlier next year, will provide marketers with a more efficient buying platform, including shorter lead times and more effective targeting of the highly coveted younger theater audience. And, as more brands include NCM's larger and more efficient cinema network in their future marketing plans, more advertising revenue will be available to our theater partners.

While it's too early to predict the potential market impact on the video advertising marketplace of the new online and video platforms over the medium to long-term, as their effectiveness is still being tested, one thing is clear. High-quality impressions, ubiquitous national scale, and the ability to better target audiences will be required in the advertising marketplace of the future. With our expanding scale and the investments we are making in our network and inventory management systems, we will be well-positioned to compete in the media marketplace of the future.

In fact, with consumers being provided increasing control over how and when they view programming, and if they view advertisements, our network will stand out as the one place where marketers can feel comfortable that their ads are being seen.

That is all I had, so now I will turn over the call to David, our interim CFO, to give you some more details concerning our Q1 financial performance and Q2 guidance.

Thanks, Kurt.

For the first quarter, our total revenue, excluding the Fathom Events division, decreased 4.7% versus Q1 2013, driven by a 17.1% decrease in national advertising revenue, including beverage; partially offset by a 36.1% increase in local advertising revenue. Total Q1 adjusted OIBDA, excluding Fathom Events, decreased 18.4% and adjusted OIBDA margin decreased to 32.2%, reflecting the decrease in high margin national advertising revenue, partially offset by the acquisition by our founding members of certain of our network affiliates and the resulting shift from the affiliate revenue share cost structure to the higher-margin founding member theater access fee cost structure.

We also recorded $200,000 of AMC Rave and Cinemark Rave integration payments for the first quarter, consistent with Q1 2013. 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. Assuming no change by the founding members resulting from the ScreenVision transaction, we expect to record $2.5 million to $3 million of these integration payments during 2014.

Our Q1 2014 advertising revenue mix shifted toward local, and was 61% national, 26% local, and 13% beverage versus Q1 2013, which was 70%, 18% and 12% respectively. Q1 national ad revenue, excluding beverage, decreased 17.1% versus 2013, driven by a decrease in utilization to 72.6% compared to 86% in Q1 2013 and a 10.1% decrease in CPMs. These declines were partially offset by network attendance growth of 7.7% related to a strong slate of films in the quarter and the addition of new network affiliates.

The utilization decrease was primarily driven by a $3 million shift in Q1 content partner must-spend allocations to later in the year versus 2013, and one national auto client that did not return. The CPM decline was due to a shift in our client mix to new client categories that traditionally buy their television and other advertising at lower CPMs, lower content partner allocations, and a soft TV scatter market. This resulted in an approximate 19% decline in the average value for national contract versus Q1 2013 against a relatively flat number of national contracts versus 2013.

With the strong Q1 box office, our quarter end make-good declined to $200,000 from $800,000 at the end of Q1 2013. Our Q1 local advertising revenue increased 36.1%, driven by a 19.5% increase in average contract value and a 16.0% increase in total contract volume versus Q1 2013. These increases were primarily driven by an increase in the number of contracts over $250,000 to 9 contracts from 2 in Q1 2013; coupled with an 18.7% increase in the average value of these larger contracts. The growth in these larger contracts during the first quarter of 2014 was due in part to the increase in network theaters and better geographic coverage in many markets and states that made our network more attractive to larger regional businesses, including the automotive and telecommunications categories.

Q1 beverage revenue increased 5.6%, driven by an 11.8% increase in founding member attendance that related to a favorable film mix; and the acquisition of certain affiliate theaters by our founding members during 2013. This attendance increase was partially offset by a contracted 5.8% decrease in beverage CPMs.

Looking briefly at diluted earnings per share, for the first quarter we reported a GAAP EPS loss of $0.05 versus $0.02 in Q1 2013. This was driven primarily by lower operating income related to the lower national advertising revenue. Our capital expenditures were $2.2 million for the first quarter compared to $2.7 million in Q1 2013, or approximately 3% of total revenue for both periods. We estimate that our Q2 capital expenditures will be approximately $2.5 million and capital expenditures for the year will be contingent on when the ScreenVision deal closes.

Moving on to our balance sheet, our total debt outstanding in NCM LLC as of March 27, 2014 was $907 million versus $890 million at the end of 2013. This increase was due to the seasonal fluctuations and working capital needs that increased our revolver balance to $37 million versus $20 million at the end of 2013. Our current average interest rate on all debt is approximately 5.3%, including our $270 million floating rate term loan bank debt and revolver balances at approximately 2.2%. 66% of our total debt outstanding at the end of Q1 2014 had a fixed interest rate.

Our consolidated cash and investment balances as of March 27, 2014 decreased by approximately $20 million to $79 million for the end of Q1 2013, with $77 million of this balance at NCM Inc. The decrease was driven by the payment of a $0.50 per share, or $29 million, special cash dividend on March 20, 2014. Including the Q1 available cash distribution due to NCM Inc. on May 27th and excluding tax reserves, and after the payment of the recently announced dividend to be paid on June 2, 2014, we would be able to pay approximately four additional quarters of dividends even if no cash were distributed up to NCM Inc. from NCM LLC. Our annual dividend yield is currently 5.8% based on today's closing share price of $15.29.

Our pro forma net senior secured leverage at NCM LLC, as of the end of Q1 2014, was approximately 3.1 times trailing four-quarter adjusted OIBDA, 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 leverage at NCM LLC net of NCM LLC cash balances of approximately 4.0 times at the end of Q1 2014, and our consolidated leverage net of NCM Inc. and NCM LLC cash balances was 3.6 times at the end of 2013.

Turning to our Q2 guidance for the second quarter, we expect total revenue to be in the range of $92 million to $100 million, and adjusted OIBDA to be in the range of $42 million to $50 million. Excluding Fathom Events, this implies an adjusted OIBDA decline of approximately 24% to 36% versus our very strong record Q2 2013.

As Kurt mentioned, due to the uncertainty with respect to the timing of closing of the ScreenVision transaction and its impact on our 2014 annual results, we're discontinuing our 2014 annual guidance. We plan to complete our Hart-Scott-Rodino filing over the next couple of weeks and will provide an update and Q3 guidance during our Q2 earnings call in early August.

That concludes our prepared remarks, and we'll now open the line for your questions.

Thank you.

(Operator Instructions)

Our first question comes from the line of Eric Handler with MKM Partners.

Thanks for taking my question. A few things on the Screenvision transaction. The $30 million of synergies that you're talking about, are those immediate synergies? Those seem to be on the cost side. Do you foresee any revenue synergies as well?

And then, if you could maybe talk a little bit about what is going on in the scatter market right now? Do you feel like this is all related to the upfronts right now in sports, or is there some bigger secular issue going on here with cinema?

I wouldn't say there is a secular thing going on with cinema, Eric. I think a lot of media buyers are pausing now as they analyze how the online video mobile stuff, all the new stuff is sort of working. I think a lot of people are testing it, a lot of people are trying to figure out whether it does work.

I've heard a lot of comments of saying -- I don't know whether it works or not, but it seems cool so I'm going to buy more. I think there is a lot of -- confusion's probably too strong a word, but I do think there is a lot of uncertainty in the minds of TMOs and buyers right now on what the heck to do because there are so many new options. And so, a lot of people are pausing.

We mentioned the TV upfronts because I think there is a lot more pausing, if you will, going on right now and a lot more positioning with the TV networks right now, where people are saying -- well you know, if you don't give me the deal that I want, I will put more of my money on video, on online video and mobile video. Clearly, and I've said this over the last four or five calls, there is a new competitive set out there in the video marketplace. I wouldn't say it is necessarily something to do with cinema.

As we have talked before, if you look back at our 2013 versus 2014 so far, the one [sprint] upfront commitment we had gotten a year or so ago that's not there related to our PSA, that obviously has a big impact on us, and I hate to keep looking at one big deal here and there, but it does impact us. I think everybody is just trying to figure out what works and what doesn't.

Our [bull] thesis is, and one of the reasons behind the acquisition or merger with Screenvision, is that over the longer-term, people are going to figure out what works and what doesn't. And, with the ability to skip ads pretty much everywhere you want to now in one form or another, online you can skip them pretty easy, mobile is easy, and TV is getting easier and easier, as you know, through the DVR, that we think cinema will kind of rise to the top of the video marketplace, if you will, or quality spectrum and we think that is kind of the way the future goes.

As far as your question on Screenvision, I'm not going to respond, obviously, to the revenue synergies. We haven't commented on that and don't intend to. On the operating cost side, the $30 million is sort of our best estimate.

A lot of them can be captured pretty quickly because there's so many overlapping parts of our businesses. We haven't obviously looked at things closely enough to be able to tell exactly what the timing will be, but there's clearly a lot of overlap that can be eliminated reasonably quickly, and so we're pretty comfortable with that $30 million.

Okay, thank you.

Townsend Buckles with JPMorgan Chase.

Kurt, any general expectation on when you think the transaction could close? I realize the regulatory is a key factor here. And then once the deal closes, how quickly you can get the Screenvision network onto your own and the preshows aligned?

It's a great question. Obviously, I don't have control of it. The average process seems to be in the neighborhood of six or seven months, but I've been told that given that our situation, we don't have diverse geographic regions or geographic locations that we operate in and the analysis should be pretty straightforward, that we are hopeful we can be on the shorter end of that, but again, you know these processes. You don't have that much control over them. I guess that's about the best guidance I can give you on that.

What was the second question?

Once you do close the deal, how quickly you can get the Screenvision network onto your own? And the preshows, also.

The facts are that about 75% or 80% of their network is networked either through a satellite system or through a broadband system, so getting those theaters onto our network is a fairly straightforward process, and it is very analogous when we formed NCM to begin with. At the time, AMC had a different system in their theaters, and we were able to create an interface, in effect, between that system and our system and -- we are still evaluating it.

As you might expect, this process was such that we weren't able to go in to theater by theater and check out all the theaters. We did get lists of all the equipment, we know what is there and all that of course. So, now that it is announced, we will be able to get a few of the more details that we will need to evaluate how long it's going to take. But, the good news is that most of the theaters are on a network, and that was one of the more important things for us.

They also have a number of networks that are digital that there are thumb drives or disk drives being delivered to the theater with the advertising on it. We have a few of those left, as I mentioned in my comments. We have about 800 screens that have that. They have four or five, six times more than that. The digital is already there. The projectors and all of that. We have got to put some gear in the theaters and connect to satellites and so on, so we will be evaluating that over the next time period until closing.

On the core business, you mentioned the TV upfronts holding up Q2 dollars. If I heard you correctly, is this more notable than you saw last year or you have seen in the past? And, could you see -- would you expect to see some release in June after the upfronts get going, or would you say that underlying scatter demand is clearly just coming in lower than you saw last year?

I would say it is lower than last year, although it picked up. I mentioned in my comments, we did see a pick up the last couple of weeks. All of a sudden, the scatter started to break a little bit. We also had a fairly big deal that was scheduled to run in June that moved into July, that happened on Friday. So, our guidance for Q2 we actually changed over the weekend. We brought it down a little bit because that deal moved into Q3.

It is something that, as I said before, I think there is a little more pausing going on right now in the marketplace because there is more people evaluating more platforms now to put their money. Clearly, the definition of the marketplace that we operate in right now is broader than it was five or six years ago because of the addition of the video online and mobile online. The unknown part of that, right now, is how effective those are.

The only thing I can look at in recent history is, you look at banner ads and you look how popular they were 8 to 10 years ago and how much money was being spent around them and the CPMs were $10 to $15, and today the CPM for banners are $0.10 to $0.15 and there is an unlimited supply of them. The effectiveness obviously has some impact on that pricing.

We will see where it works out. I feel pretty good about where we're going to end up, just because, as I said at the end of my comments, there is more and more control being put into the hands of the consumer on when they watch and what they watch, and if they watch ads. It's going to be interesting to see how consumers react to mobile video platforms that force them to watch ads before they talk to their friend or whatever it is that they want to see on their mobile device.

I think the tolerance level on mobile device is a little less than sitting in your living room, for sure. We will see how that works out.

On your pricing, we hear a lot from media buyers and advertisers who are big supporters of cinema but it's pricing that holds them back. With the CPMs trending down pretty meaningfully, are you seeing that incremental demand or incremental conversations start to happen?

As I mentioned, we're getting a lot of really good response in our upfront conversations on this issue of being more competitive with TV 18-49 adult demos. This is a bridge that we hadn't crossed before, and we came to the conclusion that in order to get a lot of advertisers, especially in the CPG and QSR and people that are just buying GRPs, that if we're going to get that money, that we are going to have to price it even more analogous to television, which means we have to get into the demo world.

As I mentioned in my comments, we have been investing over the last three or four years in inventory management systems that are going to allow us to get to a place where we can start to sell cinema in a little more targeted way than just movie ratings, which is the way cinema has been sold pretty much forever. I think when we can get to a point over the next year or so to be able to optimize buys for clients, we can now bring the ROI up considerably and, clearly, we will get to a point where we will do a lot more contracts. Maybe at a lower value per contract, but we will be able to do a lot more of them and have a lot more clients.

There is no question that the future is really driven around technology and the way to deliver and the ability to deliver to clients what they want and more targeted. Everybody talks about programmatic buying, and there's two aspects of that, one which I don't think I priced and high quality video will ever go to, which is putting your inventory into a blind bidding pool and let the market bid for your inventory. I don't think video will ever -- high-priced video, television video, cinema video, I don't think it will ever get to that point except for maybe a very small part of your inventory that happens to be remnant last-minute stuff.

What there is going to have happen and is something we're working on, is you're going to have to execute electronically or on an automated basis, and that is something that all the TV networks are working on, we are working on. It may have come into the thinking of the Screenvision owners that that next evolution of technology investment that was going to be required, which we are well along in making, is not something they wanted to do.

We think, once you get the network onto the same platform, you can deliver to the theaters digitally, or predominantly to all the theatres digitally and you can target through these optimizers that optimize your inventory, then you have got a much better product. The thesis is once you have that better product, more people will buy it, they will buy it at a higher price, and so on.

Great. Thanks, Kurt.

Our next question comes from the line of Barton Crockett with FBR Capital.

Thanks for taking the question. A couple of other things about the merger. Is any breakup fee associated with it?

Say that again? Breakup fee?

Any kind of breakup fee. Yes.

Yes, there is. On our behalf, there is $28.8 million, I think, or whatever the number is -- a little over $28 million breakup fee if we walk for any reason or Justice approval is not gotten. There is a $10 million breakup fee on their side, which can be increased for another up to $18 million depending on whether they sell the business to somebody else.

The theory is obviously they terminate with us because they got a higher price from somebody else. The basic termination fee for them is $10 million if they just walk. We have a year to get approval with a three month extension on that.

That's helpful. Through this process with all of these synergies looming, do you have the structure in place to incent people to continue to sell, so that revenues aren't too badly affected with the uncertainty?

A structure for who to continue to sell? On our side or on Screenvision's side?

On both sides. To keep people focused. Obviously, they're worrying about the synergies.

Barton, I'm not sure the synergies are based at all on the sales. In fact, the $30 million has nothing to do with revenue synergies. I guess you could make the argument --

My question was are you giving attention to the sales people who might be worried about losing their jobs as you go through cost cutting?

That is up to Screenvision. That's really not our risk. In fact, if their salespeople leave, and the theory is the cinema advertising is going to be bought, chances are it may come to us. In a weird way, it is not terrible if people leave.

It's not what I want. They're obviously putting in retention situations as well. If you assume that cinema is going to be bought and they are not selling it, then it comes to us, right?

That makes sense. One final question. The second quarter number down so much, would this second quarter have been consistent with the guidance, which is now removed, but when you gave that guidance were you contemplating a second quarter down this much?

Yes, we were. One of the things that we looked at when we gave our annual guidance was the softer first and second quarter. I guess the short answer is yes.

I want to put a little thing in perspective. Last year's Q2 was the best Q2 we've ever had in our history. I think it was up 14% or 17% from the previous year, 2012. And just to put that in perspective, there was $122 million, $123 million of revenue last year, and some of that was Fathom, obviously, but -- $110 million the year before that, and $100 million in 2010. We're kind of in the range of the last three or four years, except last year happened to be a really good year and then, as you know, we had a little bit of a soft third quarter last year.

It was taken into account when we gave our guidance at the beginning of the year.

That's great. Thank you.

Our next question comes from the line of James Marsh with Piper Jaffray.

I'm just wondering how Carmike fits into all this. I recall them being equity owner in Screenvision, had a board seat. Where do they fit in all of this when everything settles down?

I don't know, their call, actually, is going on right now. They started exactly the same time we did. We did plan to -- we released and then they released right after us, because I know Dave is going to talk about this from their perspective.

I don't know exactly what he is going to say, but I imagine that he is going to say that the unrealized benefit on their balance sheet of the investment in Screenvision is now -- this deal obviously monetizes that or crystallizes that. You may want to look and see what he did say, because I know he was going to comment on it.

Okay, thanks very much.

Our next question comes from the line of Ben Mogil with Stifel.

Good afternoon. Thanks for taking my call, and congratulations on getting the deal done. How long is the Screenvision holder's lockup for?

Lockup? You mean the exclusivity?

No, sorry. The 9.9 million shares you're receiving.

Oh. There is no lockup.

Okay. The press release was, not vague, but obviously cautious that you assume you're going to [vend] in the asset, but there's actually no assurance of that. Is this the founding members having final say on whether they theoretically want Screenvision or not?

No, not at all. It is really structured as a two-step process, and the first step is that the public company merges with their public company and we merge their public C-corp -- their private company C-corp, rather, out of existence. One of the challenging parts of our structure is we have this flow through mechanism at the LLC level, so we had to come up with a tax structure that would allow for the assets to be taken out of their C-corp and into our C-corp on a tax-free basis, because the shares that are being issued to them are on a tax-free exchange basis.

Once the assets are sitting then at ink level, the only way that we can capture the synergies associated with the deal is to then contribute the assets down to the LLC level in exchange for LLC shares so that you will have the same number of LLC shares issued to Inc. as you had issued to the public, so they will be in that one to one ratio.

The two-step part of that was very important. The only way we can capture the synergy benefit of the transaction is to contribute into LLC. It would be, I think, probably not in the circuit's best interest to not do that, because all the synergy benefit is trapped at the LLC level because that is where all the operations are, right?

By contributing the assets down -- if that is what happens, we contribute the assets down, they are now in an LLC, there is no corporate tax structure. Because putting a C-corp that is taxable underneath an LLC, it gets double taxed. So, it gets taxed before it get distributed to the circuits and to the public company, and to the public company -- it gets taxed again at the public company level. So, there's a double taxation problem. That is why we had to go through this two-step structure.

And could I know, you would not want to be double taxed, I'm presuming?

I don't think that is a good thing, is it? (laughter)

Thanks, guys.

Our next question comes from Mike Hickey with the Benchmark Company.

Thanks for taking my questions, and congratulations on the deal. Kurt, this is may be difficult, obviously, but just on that regulatory side. Do you expect any friction points there or are you pretty confident?

It's probably best that I not comment on that at this juncture. I have stated before that the primary reason that we're doing this are the expense synergies and the ability to make us more competitive in this bigger, broader advertising marketplace that we're operating in. I think that's probably -- I mentioned all of those things. I think also for the advertiser, this platform is going to become a much more efficient platform to buy than it has in the past.

I've always viewed some of the gating factors to buying cinema is the complexity of buying cinema, and the difficulty with buying cinema, and the lead times and all that stuff We're going to make all that go away, or at least bring it down to equalize with the way they buy TV and on online. I think that is a big benefit. Then, of course, if we are very successful in creating a new and better type of product, that will benefit our circuit partners, because the advertising revenue to them will go up as well.

Fair enough. One on Screenvision itself, obviously it looks like they have a fair amount of attendance here and of course you kind of split the market. Any color on utilization or CPM? Maybe how they compare? $32 million in OIBDA is obviously a lot less than what you're generating over a similar -- (multiple speakers)

Their network is around 14,000 screens, we're about 20,000 screens. The average attendance per screen in our network is quite a bit higher than theirs. Our attendance is 700-plus million, their's is 400-plus million, and so you're probably at 1.1 billion or something like that impressions, which again I think in this new marketplace is important because it gives you a heck of a lot more flexibility to package and price and slice and dice your inventory than we currently do, so that is another obvious reason to do this.

Okay. On the content partners side, how do you think this deal is going to impact?

That's a great question because if we just took our content partner deal and just spread them across this expanded network, they're getting kind of a free ride, right? I would hope, and we're going to have to structure our existing deals to say that they have to go across the NCM network, so we're going to have to work on that. We have got a few content partner deals that we're working on that will be renewed for next year, so this will obviously be taken into consideration.

It was a good question. It is something we're going to have to make sure that we take care of so that those content partners don't get all those incremental impressions for free.

Our next question comes from Eric Wold with B. Riley and Company.

Maybe you could walk us through -- I apologize if you already covered this originally, but if the combination -- the acquisition does go through, what is the process with the existing previous contracts with their exhibitors? Do those kind of play out as they are? Do they need to be restructured to fit more the National CineMedia mold?

We will obviously assume what we have got, and if there are any in process to be renegotiated, it would be nice to get them on a more consistent structure, but we have a lot of different structures in our group of affiliates that we have as well. They all have a basic structure, but they're different -- different parts of them are different depending on the circuit. We have some flexibility there.

Clearly, we would like to get to a point where our preshow, the FirstLook, is played across all networks and basically has got the same inventory on scheduling and the same inventory slots and so on, because one of the comments I made in my opening comments was we've got to have a consistent preshow and a consistent product across all of cinema to make it attractive to these big advertisers. One is the gating factors, especially for QSRs who want ubiquitous coverage across all the theaters so they have a theater close to all their stores, is that they need something they can buy efficiently and it just hasn't been that way.

We have tried over the years to kind of get together and allow them to buy us and Screenvision at the same time. It is just really complicated, and buyers just don't want it to be complicated. I think once we get the FirstLook across all of our platform, I think we will be in much better shape.

Okay, then last question, assuming the deal goes through and you will evaluate those contracts outstanding as they are, but from your [three] founding members standpoint, the day the deal goes through, are all Screenvision's exhibitor partners [essentially] NCM such that they would get shares from acquiring [AM] or is there any kind of delay on that?

It would be exactly the way it is today if they buy one of our affiliates. In the case of Kerasotes or Hollywood or Rave, if those were existing affiliates, all we end up doing is flipping from the rev-share model, which is lower cash flow for us and lower margins for us, into the peer access fee structure, where they get shares, obviously, LLC units.

But it is a much lower payment to us for access to the theaters, so it increases our margins and reduces leverage and so on. It would not matter whether they were Screenvision prior to the acquisition or not. They would all be treated the same.

By the way, your research that came out last week made us laugh as we were working on the deal. We thought maybe you had a bug in our office or something.

I wish, but thank you guys very much.

(Operator Instructions)

Our next question comes from James Dix with Wedbush Securities.

Good afternoon guys. Well, Kurt, [maybe no new rules] in terms of acquisitions, I guess. Just starting with the fundamental core business, you mentioned the shift of a buy from the June quarter back to the September quarter. Any rough magnitude of things which you think are kind of shifts, as opposed to not knowing whether they are shifts at this point?

That was the only one that I can point to where we know what happened because it just happened on Friday. We had a little bit higher guidance set to go on Friday, and our sales guys confirmed that the client wasn't ready to launch, and so it got moved. That is the only one I can point to.

Any rough quantification on that, like how big that was?

A few million dollars.

Okay, great. In terms of the Screenvision deal, you answered a little bit about another round of investment necessary to upgrade networks, and maybe that was something Screenvision owners were thinking about. Anything else going into the timing of the deal? Why now?

I have always said, and I think I mentioned this to you guys in the past, that if you look at their growth and their revenue and cash flow over the last year, they had a very poor first quarter of 2013. In fact, I think it was the worst first quarter by a long shot in the history of the business. They lost several million dollars of cash flow in that quarter. It was just a really bad quarter. They did tell us that they had some sales team issues and some other stuff, they had to make some changes, and they did make some changes early last year.

They were able to grow the revenue back up, but I always thought that when they make the replacement of the first quarter of 2013 with the first quarter of 2014, their cash flow is going -- or trailing four quarter cash flow was going to jump up, and that might be a triggering point or a catalyst point for them to think about selling the company.

It is also private equity owned. They would have been in the deal for around three and a half years at that point, so the pressure starts to build a little bit from an exit strategy standpoint. So, I think those two factors triangulated into -- this was probably a time that they might entertain doing a deal.

Okay, that is very helpful. In terms of the impact on your founding members ownership of you, [managing] is diluted down by the number of shares which get issued and is there any anti-dilution which occurs?

Basically, it is pretty straightforward. If we do the two-step that I talked about before, there would be 9.9 million LLC units issued to match the 9.9 million shares in the market, and I think the ownership goes to basically 50/50 at that point in time. Yes, 49.5% to 50.5%. It's close enough to 50/50 and that is where it will end up.

Okay, great. One last longer term one. How important do you think things like project Turbo and other things that make more digital speed in terms of ability for advertisers to get in and out and adjust is going to be for cinema in particular? Or do you think with cinema, as other media start to [morph] the ability to actually deliver ad reach, will be able to kind of rise above the need to be that fluid?

I've heard a little bit about some of that may be affecting outdoor, which is almost at the other end in terms of it's ability to be very flexible to advertisers. I just want to know what you think the long-term importance of that is to cinema as kind of a premium CPM medium?

One of the theses I have about this acquisition is that I thought we were going to be able to apply a little capital to this asset combined with our assets, and really make it a much more efficient network which will hopefully allow us to get the utilizations up over time. I do believe that the ability to deliver on an automated basis -- again I like to stay away from that word programmatic. I think that word is overused today in the media world. I'm not talking about letting machines in a marketplace sell our inventory. That's not what I am talking about.

I am talking about the ability to have the human beings, our sales people, negotiate deals and the deals can then be executed a lot more electronically than they are into various media plans that are either done by the agency exchanges or client private exchanges or other things that are happening out there to execute advertising contracts. I do believe that all mediums are going to have to have the ability to execute those things with shorter lead times and more efficiently. It is just happening, and everybody has to be able to do that.

I'm not going to say that they won't buy you if you can't do that, but I clearly think you are at a disadvantage if you can't do that, and so that is one of the reasons we started -- we saw this coming a few years ago, and it's one of the reasons that we've already made the investments we have in our inventory management systems. I may have mentioned on the last call, we just launched our new inventory proposal and inventory management system to our whole local sales force in the first quarter, and that system is going to continue to be upgraded and then, eventually, we will have even higher levels of automation to be able to optimize buys a lot better.

It is all about trying to get less and less waste associated with a demographic target or other characteristics the customer client needs and wants. The more and more you can target that demo or cut that demo into the pieces that the client wants, the better off you are and the more effective that buy is. That is the direction we are going, and I do think it is important and we will be there.

Do you think that affects the amount of inventory that you [would accept] from your upfront process over time? Does the coming (inaudible) make advertisers more or less interested in committing to you in an upfront type process?

I think there is always going to be a certain aspect of upfront, and you may also get to a point where you have the agencies committing to actually more up front inventory of various kinds just because they can execute it more efficiently across all of their clients. Because if all their clients are in their systems, their exchanges that they can use to allocate inventory to all of those various clients across all their various brands and intersect that, if you will, or interconnect that with all the suppliers, the networks who have the inventory, and you can do that in an efficient way, it may actually lead to a situation where they are willing to commit more up front.

We are currently talking to agencies about that very thing with us, is that if we can get an agency to commit up front, maybe they're a content partner for instance, or make other big commitments to us that then they can allocate to all of their clients, and I think it makes it more efficient for them because they know how much supply they have then.

Right, great, thanks again and congrats on the deal.

Thank you very much.

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

Thank you very much, everyone, for joining us today and, as always, for your support. I know that we threw a lot at you today, especially with the Screenvision transaction, so we will be available tonight and over the next few days if anybody has any follow-up questions. Thank you very much, and I'm sure we will be talking soon.

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