National Cinemedia Inc (NCMI) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the National CineMedia First-Quarter 2015 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. Thank you.

Sir. You may begin.

Good afternoon. I'd like to remind our listeners that this conference call contains forward-statements within the meaning of the 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.

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'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 2015 Q1 earnings conference call. During this call, I'll provide you with a brief overview of our Q1 actual performance and color concerning market trends, progress against our business plan, and our future guidance. David will then provide a more detailed discussion about our Q1 results and provide some more details regarding our guidance for Q2 and full year 2015. And then, as always, we will open the line for questions.

After solid growth in Q4 of 2014, the momentum continued into 2015, with record Q1 non-beverage advertising revenue. Total Q1 revenue growth of 10% versus Q1 2014 was driven by a 19% increase in the National Advertising revenue, and a 2% increase in Local Advertising revenue, partially offset by a decrease in Beverage revenue.

Q1 adjusted OIBDA growth of 23% finished at the upper end of the guidance range due to late-breaking scatter deals, as well as tight cost controls. The growth of our high-margin advertising revenue and cost controls drove the 380-basis-point increase in Q1 adjusted OIBDA margin versus Q1 in 2014. The 19% increase in Q1 National revenue reflected last year's successful national upfront campaign, that meaningfully increased our Q1 inventory utilization to 100%, based on our standard load of 11 30-second national ad units. Another Q1 record for our Company.

This higher Q1 inventory utilization was primarily driven by multipoint packaging that is an important part of our overall upfront strategy. This packaging tactic, combined with a few higher-priced deals included in Q1 2014, contributed to our 11% Q1 CPM decline versus Q1 2014. While this strategy resulted in lower Q1 CPMs, it was more than offset by higher utilization during this historically softer demand period.

In addition, annual upfront commitments that included lower-priced Q1 inventory were generally packaged with higher-priced inventory that will run later in the year. These future quarters will also benefit from the implementation of some new technology that will allow us to execute a more dynamic scatter pricing strategy that adjusts week-to-week pricing expectations, based on market demand and inventory utilization levels.

This, combined with higher upfront commitment levels and good scatter demand, is expected to result in a year-over-year CPM increase in the higher-demand periods throughout the rest of the year. Including Q2, where we are currently expecting a CPM increase of approximately 10% versus Q2 2014. These higher Q2 CPMs are expected to result in a low-single-digit CPM increase for the first six months of 2015 versus the same period in 2014.

Our upfront strategy and recent strong scatter demand has also helped us continue to expand our client base. So far this year, we have added 20 new national clients from 11 different industries, with 10 of these new clients spending during the first quarter. This is slightly ahead of the 2014 pace, when we had added 18 of the total 48 new clients that were added for the entire year. The new national client additions so far this year include businesses in the apparel store, apparel and footwear accessories, auto parts and service, health and fitness, Internet, liquor, personal care products, prepared foods, restaurants, spa and salons, and video game categories.

Our Local Advertising business posted record Q1 revenue for the third year in a row, as our Q1 local revenue grew approximately 2%. On top of the previous two years that grew 36% in 2014 versus Q1 2013, and 22% in Q1 2013 versus Q1 2012. The Q1 2015 growth was driven by an increase in revenue from larger multi-theater deals between $10,000 and $250,000, partially offset by a decrease in the number of smaller local contracts below $10,000.

The decrease in the volume of smaller local contracts appear to reflect a less favorable fiscal calendar. Whereby the highly attended holiday week between Christmas and New Year's Day fell in the fourth quarter of 2014, instead of the first quarter, as it did in 2014. We also had more open local sales positions due to our planned integration of the Screenvision business. We have made very good progress filling these open positions within our nearly 200-person local and regional sales staff. And we are now back to approximately 10 unfilled positions, that is consistent with historical levels.

While there will be some lag in productivity from these new local salespeople as they are trained and build their client base, we are currently expecting our Q2 local revenues to increase mid-single to low-double-digits versus Q2 2014. As we continue to benefit from a stable economy; the expansion of our network; and better geographic coverage within DMAs that helps our regional business compete more effectively with local TV affiliates, newspapers, radio and billboards.

Consistent with the growth of Online and Mobile Advertising platforms, we're also projecting strong Online and Mobile revenue growth for the first six months of 2015 versus the same period in 2014. While this component of our business remains a relatively small part of our total national revenue, our strategy of packaging our national and local in-theater inventory with our Online and Mobile inventory is important. As it provides marketers with a unique way to connect with valuable movie-going audience before, during and after the movies.

The ongoing expansion and improvement of our National Cinema network continued to improve our competitive positioning across all of our ad businesses, and helped us provide more advertising revenue to our theater partners. We had approximately 20,100 screens in our network at the end of the first quarter of 2015. This increase of over 200 screens versus the end of Q1 2014 relates to the addition of several high-quality regional circuits, and new net theater additions by our founding member circuits and existing affiliates.

While we currently have network coverage in 183 of the 210 TV DMAs, we will continue to aggressively expand our network to new markets and improve our coverage in existing markets. In order to improve our overall value proposition to businesses that require greater national reach and more ubiquitous market coverage.

As previously announced, the Cinetopia Theater circuit has been connected to our network this year during early Q2. And Santikos Theaters will join our network in Q1 2016. These future additions will add over 8 million annual theater patrons and strengthen our market coverage in several larger markets, including San Antonio, Houston, Kansas City, and Portland, Oregon.

All of our affiliate circuit partners are benefiting from being part of our larger network. During 2014, our local affiliate advertising revenue per affiliate screen was approximately $12,900. And with our strong advertising revenue growth projected in 2015, our total affiliate advertising revenue per screen should increase even further. In fact, total payments to our affiliate circuits in Q1 2015 were up 17% versus Q1 2014.

This projected growth in affiliate payments and the high-quality entertainment experience we deliver to theatre patrons through our FirstLook pre-show provides significant advantages to smaller regional circuits. So I am confident that we will continue to add new circuits to our network.

We also continue to improve the quality of our network distribution and projection technology to provide a better value proposition for advertisers. 100% of our network screens now utilize digital projectors, with approximately 84% of our screens featuring the higher-quality digital cinema projectors. And over 96% of our network attendants now receive our FirstLook pre-show over our digital distribution network. This broader connection to our digital distribution network allows us to shorten campaign lead times and begin to better target specific theater audiences beyond movie ratings and age and gender demographic groupings.

This type of expanded audience targeting capability is becoming an increasingly important factor to media buyers. And thus, we have recently accelerated the upgrade of our inventory management systems, and are developing more robust consumer analytics databases that will be used to target theater audiences more effectively than we have in the past. This approximately $3 million shift in capital expenditures into 2015 from future years will allow us to begin to provide more targeted campaigns to certain of our more significant clients this year. And will include all of our on-screen inventory in early 2016, approximately a year earlier than we had originally planned.

Looking ahead to the rest of the year, our strong Q2 revenue and adjusted OIBDA guidance reflects Q2 inventory sell-through that is approaching sellout levels, and scatter CPMs that are meaningfully higher than our Q2 upfront CPMs. Despite the strong Q2, we are not changing our full-year revenue and adjusted OIBDA guidance ranges but now expect that we will be in the upper ends of those annual guidance ranges.

While our current second-half national advertising commitments are nearly 100% ahead of the last six months in 2014 at the same time, there's still approximately 30% of our second-half total national advertising revenue budget still left to book. Q4 results will also depend on the success of our 2015-2016 upfront campaign that is in process, leading up to our upfront presentation in New York in a couple of days. Our preliminary upfront meetings have been going very well, and we will begin to get a better feel for Q4 2015 and 2016 as the upfront commitment process progresses throughout the summer.

Given the impact on the TV business of the DVR and programming fragmentation, during upfront meetings we are seeing a higher level of openness from media buyers to consider our network, as their focus has shifted to live- and event-related programming. Brands also appear to be examining more closely the effectiveness of online and mobile platforms, given the increasing level of fraud and issues relating to ad viewability.

Given all of these favorable market trends, our combination of broad national reach, reliable and high-impact viewable impressions, an engaged audience, and adjacency to high-quality event programming, positions us very well for the future.

This is all I had. So I'll now turn the call over to David to give you more details concerning our Q1 results, and Q2 and annual guidance.

Thanks, Kurt.

For the first quarter, our total revenue increased 9.5% versus Q1 2014. Driven by a 19.2% increase in National Advertising revenue, excluding beverage, and a 1.7% increase in Local Advertising revenue. Partially offset by a19.1%, or $1.8 million, decrease in Beverage revenue.

Total Q1 adjusted OIBDA increased 22.6%, and adjusted OIBDA margin increased to 36% from 32.2%, reflecting the increase in high-margin National Advertising revenue that was partially offset by the decrease in 100% margin Beverage revenue. We also recorded $300,000 of AMC Rave and Cinemark Rave integration payments for the first quarter versus $200,000 in Q1 2014.

You should note that these integration payments are added to adjusted OIBDA for debt compliance purposes, but are not included on our reported revenue and adjusted OIBDA. As they are recorded as a reduction to net intangible assets on our balance sheet. We continue to expect to record approximately $2.5 million of these integration payments from the founding members during 2015.

Our Q1 2015 advertising revenue mix shifted due to the higher national growth. And was 66% national, 24% local, and 10% beverage versus Q1 2014 that was 61%, 26%, and 13%, respectively. The Q1 National Ad revenue, excluding Beverage, that increased 19.2% versus Q1 2014, was driven by a 38.2% increase in impressions delivered. Partially offset by a decrease in CPMs of 11.1% versus Q1 2014.

The increase in impressions delivered was driven by an increase in inventory utilization to 99.9% from 72.6% in Q1 2014. Due to an overall expansion of our client base, related in part to the success of our strategy to compete in the national television upfront marketplace since 2012. This increase in inventory utilization was partially offset by a 3.1% decrease in our network attendance that was impacted by our fiscal calendar. Whereby the highly-attended holiday week between Christmas and New Year's Day fell in the fourth quarter of 2014, rather than the first quarter, as it did in the prior fiscal year.

As Kurt mentioned, the decrease in CPMs was due primarily to the success of our upfront packaging tactics that helped increase utilization during the historically lower-demand first quarter. Our quarter-end make-good balance decreased to $1.5 million from $2 million at the end of 2014, due to the unexpected strength of several first-quarter films.

Our Q1 local advertising revenue increased 1.7%, driven by a 5.7% increase in average contract value, partially offset by a 5.1% decrease in total contract volume versus Q1 2014. The increase in average contract value was driven by a 7.8% increase in the average value of contracts between $10,000 and $250,000, offset by decreasing contracts over $250,000. While the decrease in contract volume was driven by a 7% decrease in the number of contracts under $10,000.

Q1 Beverage revenue decreased 19.1% versus Q1 2014, driven by the 14.4% decrease in beverage CPMs that is tied to our decrease in 2014 national segment one CPMs. And the 3.1% decrease in founding member attendance that related primarily to the unfavorable fiscal calendar discussed previously.

Looking briefly at diluted earnings per share, for the first quarter, we reported a GAAP diluted EPS loss of $0.15 versus a loss of $0.05 in Q1 2014. Excluding $33.4 million in pre-tax legal costs and termination fees associated with the termination of the Screenvision merger agreement during Q1 2015. And non-cash charges related to terminated interest rate slops in both Q1 2015 and Q1 2014, first-quarter diluted EPS would have been $0.01 versus a loss of $0.04 in Q1 2014.

Our capital expenditures were $2.1 million for the first quarter compared to $2.2 million for Q1 2014, or approximately 3% of total revenue for both periods. As discussed, we are accelerating the development of our inventory management systems and audience targeting to more effectively compete in the video advertising marketplace. And thus, we now estimate that our full-year 2015 capital expenditures will be in the $13 million to $15 million range, remaining at just 3% of the midpoint of our revenue guidance range for the full year.

Before moving on to our balance sheet, I'd like to take a minute and discuss the impact of the merger-related expenses, including the $26.8 million termination payment, on our debt levels and dividend cushion. All merger-related expenses were funded by NCM's LLC during the first quarter of 2015, either directly or through a payment to NCM, Inc. to reimburse it for costs paid during 2014. The payment of all of these costs resulted in a negative available cash distribution calculation for Q1 2015 of $25.5 million.

Under the terms of the NCM LLC operating agreement, this negative Q1 2015 available cash will be funded by the three theater circuits and NCM, Inc. based on their pro rata ownership in NCM LLC. through a reduction in the available cash distribution calculation in the second quarter of 2016 which will be paid in the third quarter of 2016. Until such time, the negative available cash amount will be funded by the NCM LLC revolving credit facility.

As we discussed on our last call, the cash impact of the merger-related costs to NCM, Inc. after the reduction in NCM LLC distributions in Q3 2016 will only be $11 million net of tax benefit. Thus, the merger-related costs will have minimal impact versus historical levels of approximately four quarters based on current dividend levels and no additional distributions from NCM LLC.

Moving on to our balance sheet, our total debt outstanding at NCM LLC as of April 2, 2015, was $938 million versus $892 million at the end of 2014. This increase was due to a $46 million increase in our revolver borrowings that was almost entirely driven by the payment of the Screenvision termination fee and merger-related costs by NCM LLC. Our revolver balances will decrease by $25.5 million when the merger-related expenses are netted against available cash distributions in the third quarter of 2016.

Our average interest rate on all debt was approximately 5.3% at the end of Q1, including our $270 million floating rate term loan bank debt and revolver credit facility that had a rate of approximately 2.4%. Excluding revolver balances, 69% of our total debt outstanding at the end of Q1 2015 had a fixed interest rate.

Our consolidated cash investment balances as of April 2, 2015, decreased by approximately $1 million, to $78 million, from the end of Q1 2014, with $75 million of this balance at NCM, Inc. Excluding tax reserves and after the payment of the recently-announced $0.22 per share dividend, to be paid on June 9, 2015, we would be able to pay our current dividend per share for over four additional quarters. Even if no cash were distributed up to NCM, Inc. from NCM LLC.

Our annual dividend yield is currently 5.9%, based on today's closing share price of $14.90. Our pro forma net senior secured leverage at NCM LLC as of the end of Q1 was approximately 3.6 times trailing fourth-quarter adjusted EBITDA, which is well-below our senior secured leverage maintenance covenant of 6.5 times.

You should also note that while we had no NCM total leverage or NCM, Inc. consolidated maintenance covenants, our total leverage at NCM LLC, net of NCM LLC cash balances, was approximately 4.6 times at the end of Q1 2015. And our consolidated leverage, net of NCM, Inc. and NCM LLC cash balances, was 4.2 times at the end of Q1 2015. Our leverage has increased by approximately 0.2 times, due to the funding of the merger-related expenses previously discussed, until the third quarter of 2016, when the revolver balances will be repaid through the $25.5 million reduction in distributions to NCM LLC's members.

Turning to guidance, for the second quarter, we expect total revenue to be in the range of $116 million to $122 million, and adjusted OIBDA to be in the range of $61 million to $67 million. This implies an adjusted OIBDA increase of approximately 17% to 29% versus Q2 2014.

The increases are due to growth in both our National and Local Advertising businesses. National revenue is expected to increase 23% to 29%, driven by significantly higher utilization and a projected CPM increase of approximately 10% versus Q2 2014. While our Local and Regional Advertising revenue is expected to increase 4% to 11% versus Q2 2014, due to the continued expansion of our network and favorable film slate. These Q2 increases are expected to be partially offset by an approximate 9% decrease in Beverage revenue.

Full-year 2015 national upfront bookings remains strong, with 85% of our National Advertising budget currently booked versus 61% of actual full-year 2014 National Advertising revenue at this same time last year. Focusing on Q3 and Q4, approximately 70% of our second-half 2015 National Advertising budget is currently booked versus approximately 38% of our second-half 2014 National Advertising actual results at this same time last year.

While we are encouraged by these upfront-driven booking increases, recent strong Q2 scatter demand and positive feedback from our early upfront discussions with agencies and clients. We are remaining cautious, as it is still early in the year and we have approximately 30% of our second-half 2015 National Advertising budget left to book. As such, we currently expect full-year 2015 results to be in the upper end of the $422 million to $432 million revenue, and $210 million to $220 million adjusted OIBDA annual guidance range, as previously provided.

Finally, I'd like to remind everyone that in 2015, approximately half of our content segments have been reduced to two minutes from two-and-a-half minutes. This change has allowed us to increase our sellable inventory and revenue potential in half of our network by adding up to two 30-second national or regional ad units, and one 30-second local ad unit. This change results in a utilization potential that has increased from 127% in 2014 to 136% in 2015.

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

(Operator Instructions)

Our first question comes from the line of Townsend Buckles with JPMorgan. Please proceed with your question.

Thanks. Kurt, it sounds like the business is tracking very well. Can you talk about how you're seeing scatter pacing? Has it been a pretty steady progression of strength in the year? Or any variability or lumpiness in demand as you look to book the rest of the summer box office season?

Well, the one trend that we continue to see -- and we mentioned this on previous calls -- is that scatter seems to be breaking quite a bit later than it did historically. And I can tell you that the guidance you've seen us give in Q2, a lot of that money came in, in the last three to four weeks. And so we're clearly seeing this continuing trend of late-breaking scatter. I don't know if it is being driven by the greater influence of the digital stuff -- the online and mobile stuff -- as that can generally be booked later. But clearly, something is going on there.

And can you give any color on how you're seeing Screenvision compete in the marketplace since you parted ways? And with the upfront underway, any difference in how they're positioning themselves?

Things obviously got very competitive a year or two ago, that your revenue and CPM guidance is clearly strike quite strong here. Do you feel like cinema overall is doing quite well? Or do you feel like there's some market share shifts going on?

I think clearly there was some market share shifting going on. But I think there is very strong demand for us right now, as you can see from our numbers. So I'd like to think that buyers are just looking at cinema a little more seriously than they have in the past.

All right, great. Thank you.

Yes. Welcome back.

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

Okay, great. I wanted to probe a little bit more on the drivers of the revenue growth, which is tremendous this year. And really thinking about the sustainability of this as we get pas this year and into next year.

If you were to rank order what's really the most important factors, how would you rank excitement about the movie slate among advertisers, versus wanting to get behind the winner -- what seemed like a winner for the while in the Screenvision-NCM merger saga? Versus just a sea change in sentiment towards theater advertising?

Let me just go about it a different way. Because the answer to your first choice -- the film schedule -- I think is clearly a more important factor for our local business than our national. I don't think the national marketers generally schedule their product releases or other marketing plans around film schedules per se.

In the local business, clearly the local advertisers pay a lot more attention to the film mix. Because people are generally in the receipts earlier when there are blockbusters playing. And because the local and regional ads play further from the advertised show time, that is a good thing for those advertisers, who generally pay us on a screen-per-week basis. So it's a little different answer, depending on what medium you're talking about.

I obviously don't know what extent any of the Screenvision merger potential affected people's buying behavior. People don't generally tell you those type of things. I'll leave that for other people to speculate about.

The one thing that is very clear out there -- and you saw it, I think, last year in the movement of upfront money to us in September and October -- that there is a shift going on in the marketplace with regard to the allocation of video budgets. Clearly, the online and mobile networks are benefiting from that. And it appears as though we are benefiting from that as well.

And so I think the prospects of our network, I think, are quite good right now, given some of the dynamics going on in the marketplace that is being caused by programming fragmentation, over-the-top adoption, DVR adoption. And as I mentioned in my comments, I'd also think that marketers are, for the first time in really the history of this video digital revolution, if you will, the first time that marketers are really taking a hard look at fraud and viewability and some of the shortcomings of digital.

I think up until now, there's been a rush of money into that medium. That has now, I think, such a big number, that people are starting to ask the question more often -- does it work and are my ads actually being viewed, and so on.

Okay. And also, to be clear, competitively, I think Screenvision was disruptive a little bit in the sales force, as well as you. Are you seeing that they're back out there selling like they were before, as engaged? Or are they still at a place where they're struggling to get back in gear?

The only point of reference I have is that Screenvision had their upfront last week. And a lot of the messaging in their upfront was more about the film release schedule and all the positive attributes of cinema, generally. So all I can take away from that is that they're selling the value of the cinema platform, which I think is a really good way to go.

Okay, great. I'll leave it there. Think you.

You're welcome.

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

Great, thanks very much. Just two quick questions. First, I was just hoping you could give us an update on what's going on with beverage these days, and what the outlook is for that category?

And then secondly, I think, Kurt, you mentioned liquor advertising. I don't recall that really being mentioned before. I'm just wondering, what kind of restrictions there are outstanding on that type of advertising?

I know in the past, television, it was a little bit problematic. But maybe you could just update us on what, if any, restrictions are available there?

Sure. We generally try to follow what is followed on TV. There are no actual laws, but there is a rule of thumb the networks try to follow, where at least 70% or more of the audience will be of drinking age, of 21 or greater. So we try to follow some of the same rules. And it generally means that we're going to only play liquor ads against R-rated films.

We've gotten a little more specific. We've taken horror and other R-rated films that generally attract a younger, late-teen, early-20s audience, we usually take those out of the mix, because we know they have a very high SKU of people that are not of drinking age. On occasion, we will add in PG-13 or PG films that are of a much more higher age target. But again, the goal is to try to comply with the 70% or more guidelines that the television marketplace uses.

And the first question was on beverage. As you know, the beverage revenue is completely contractual with our founding members. The decrease this year that you're seeing, I think we said was coming, in our last call, was almost 100% based on the fact that our CPMs for our best inventory -- primarily segment one inventory -- went down last year. I think the number was around 14% or so. So we're hopeful that this year, with the stabilization of our CPMs -- albeit at a lower level -- that we see that revenue also stabilize.

Okay, helpful. Thanks, you guys.

You're welcome.

Thank you. Our next question comes from the line of Eric Handler with MKM Partners. Please proceed with your question.

Yes, thanks for taking my question. Kurt, why don't you talk a little bit about -- with this year's up[grind], last year, you had a very nice deal -- $50 million deal with Omnicom. So going directly with the buying agencies, is that going to be a bigger focus for this year? And how do you balance going directly with the advertiser versus the buying groups? How does that play out in terms of the upfront?

And then secondly, I'm wondering if you're seeing -- as the upfront fully heats up right now, are you seeing any pauses being taken by advertisers, as they try to figure out what CPMs are going to be asked for from the broadcaster cable networks?

Yes, I'll answer the second one. It's easy, because the activity we've seen over the last four weeks, as I mentioned, has been pretty robust. So we clearly haven't seen, as relates to us, any impact of any positioning that may be going on in the TV marketplace -- the upfront market place. I can't really tell, Eric, if there's any impact on what's going on there. All the evidence that we seem to see right now is that there's a pretty favorable view of our network. What was the first question?

Talking about a strategy of going (multiple speakers)

Look, at the end of the day, it's up to the client on how they want to handle that. We obviously are approaching both agencies and individual clients during the upfront process. If clients and agencies agree that, that client is going to be a part of a bigger deal that the agency may do with us, then that's obviously what will happen.

So we're going down parallel paths during this upfront process, in dealing with both clients and agencies. And as you pointed out, we were able to get one agency on board last year. We hope that we'll be able to get more on board this year.

Great, thank you. And I just had a quick follow-up. What percentage -- as you think about agencies versus companies, your agency deals, just the $50 million and that's it. So whatever growth you get from that is what your agency revenue is -- everything else is directly from clients?

That was true for last year, obviously. I don't know how that's going to play out this year. But yes, the only agency deal that we had last year was the Omnicom one.

Great. Thanks a lot, Kurt

You're welcome.

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

Good afternoon, guys. Two questions. As the upfront is becoming a bigger part of your overall business, if you could just remind us, what are your basic upfront cancellation policies? And what have you seen in terms of any cancellation activity as you've moved forward through the year? I think it's just helpful for us to understand the degree of visibility you think that those upfront commitments are giving you, especially as they scale.

And then my second one was just on -- any particular color you can give on the improvement in the scatter market in the second quarter? Do you think there's anything related to verticals, or anything in terms of shifts? I'm just curious about that. Thanks.

Yes, as far as the upfront stuff -- or, excuse me, the Q2 stuff, we talked about in our comments the various client categories that we're experiencing some strength in. And so I think I'll just leave it at that. And I think you can either look at your notes or we can go over that later with you, which categories that was.

We're not seeing any specific category being stronger than the other. I think the only trend we're seeing is that there's a lot more openness across categories that we've never been able to talk to before in a rational way, than there has been in the past.

Again, I think, given what's going on in TV and some of the other mediums that we compete against, I think we're just seeing a much more open dialogue than we have in the past. We're also benefiting, I think, as we go into the upfronts, from the fact that our upfronts -- sorry, our scatter pricing is meaningfully higher than our Q2 upfront or our full upfront pricing was. So that's obviously a good fact as you go into the upfronts.

The upfront cancellation policy -- what we try to do is stick fairly close to the way the TV guys think about it. Earlier commitments are more firm than later commitments.

I can't give you a statistic, because it's all over the board, depending on the client. I'd rather not just generalize, because again, it does fluctuate by client. But we generally try to follow some of the rules that are implicit in the TV marketplace.

But just so I understand, has your experience been that most of those upfront commitments have ended up turning into revenue, even as that scale has become a bigger part of the business?

So far, I'm not aware of any full-on cancellations. We've had some stuff move around from quarter to quarter, but we've not had any cancellations to this point.

Okay, great. Thank you.

You're welcome.

Thank you. Our next question comes from the line of Mike Hickey with the Benchmark Company. Please proceed with your question.

Hello, Kurt and David, I hope you guys are good. Thanks for taking my questions. Just curious on your first-half performance potential here. Obviously Q1 is booked, and Q2 looks really promising, given your guidance.

Did you feel some of that presumed strength is in part attributable to what appears to be meaningful disruption in the Screenvision business from the attempted acquisition? And then I have a follow-up.

I didn't actually understand what your question was there, Mike. Could you maybe be a little more direct?

Yes, I'm just saying that your first-half performance seemed to look very strong. And I'm just curious if some of that strength that we've seen in Q1 and expect to see in Q2 is in part attributable to the disruption in Screenvision's business from the attempted acquisition?

I don't really know about that. It's hard to say what the disruption factor is. They were still out there selling hard. So I can't really comment on that, Mike. It would be total speculation at this point.

All right, fair enough. And then I'm curious on the upfront sale here. Obviously you've had a lot of success, and it's been a gradual win for you and your team over the years. But given the success in the upfront, do you think some of this will challenge your scatter selling?

The idea is that there might be some shift in the scatter money we see up front, and I think you surfaced that concern before. And if it is a concern, perhaps that's why your fiscal year guidance seems somewhat conservative, given the strength of your current business?

Look, there's no question that a lot of our clients that historically booked in the scatter market, booked up front. And we've taken that into consideration in giving some of our guidance.

I think clearly what you would view as our conservatism is just our point of view that we've got half a year left.

This is pretty early in the year to start moving your guidance. And we did give a little optimism within our current guidance range, up to the upper end. So I think at this point, that's what we were comfortable with. I just think at this point, it's best this early in the year for us to approach it this way.

All right, thanks, Kurt. Best of luck in the upfront, guys.

Thank you very much.

(Operator instructions)

Our next question comes from the line of Jim Goss with Barrington Research. Please proceed with your questions.

All right, thanks. I was wondering -- did you say what the sellout ratio was last year? And what you are hoping for incrementally this year? In terms of upfront.

Yes, just a minute. We're looking back through to get the exact language. I want to make sure. The upfront last year, I think, we went into the year just over 70%. Now we're up -- I think we had said 84% or something like that -- 85%, sorry. 85% of the year booked right now.

Obviously we've made some progress since we talked before. I think, Jim, anywhere in that 70% to -80% range, as you go into the year, is a good place to be for us. The cable networks are in the mid-70%s. Historically, the broadcast networks have been over 80%.

I think what we're seeing this year with our scatter pricing being so much higher than our upfront pricing, that obviously may give us a hope to be at the lower end of that range this year. And that may be a good thing for us, because there may be some expansion revenue opportunities in the scatter market.

Having said all that, there's no question that the upfront strategy for us has been a great success. Because it's allowed us to create a base of business that allows us to package, as I said before, higher demand flights with lower demand flights.

Being able to sit down with a client at the beginning of the year and talk about the whole year is very beneficial for us. Because it cuts down on our volatility, it allows us to look at what the marketing plans are of the client and match those with our available inventory.

So that discussion that is going on as we speak, and will go on throughout the summer, is a very good thing for our business. And I think it actually allows clients to be able to use our network more effectively than they have in the past.

Okay. I think it was very encouraging that you had basically 100% utilization in the first quarter; you're close to that in the second quarter. I assume you'll be at least somewhat more conservative in pricing until you achieve that in the full year, and then you'll feel you have the pricing power to go forward?

Yes, Jim, just to be clear -- and David mentioned it, and I alluded to it -- the 100% that we quoted in the first quarter is really about 73%, based on all the available inventory we have. As you know, those percentages that we put out there -- the 100%, for instance, in the first quarter -- are based on a denominator in that calculation of 11 30-second units.

As David mentioned, we have more than 14 30-second units now, and so our total sellout would be -- the way we talk about it -- would be 137%. We still have some work to do in the first quarter to sell out our inventory. Those numbers obviously will be higher in the second and third and fourth quarter, as they usually are.

And do those figures include the movement from 2 minutes to 2.5 minutes in the (multiple speakers)?

As you may recall, we always used to say that we were -- about 127% would be full sellout, which is basically just mathematically 14 over 11. Now the number, if you do the calculation, is about 136%. We only got back that 30-second unit in about half or so of our overall network. So when you do all of the math, it comes out to about 136%.

Okay. Last question. Are you finding -- and you may have talked a little bit about this earlier. But are advertisers buying specific titles, rather than weeks, or whatever happens to come out on the screen?

We won't let them buy specific titles. That's just not a good way to sell our inventory. Because you end up with too many tales that you can't sell.

So historically, we've always sold by film rating. There's four basic rating groups -- G, PG, PG-13 and R. Now we are moving to what is more sort of film genre, which includes a fairly broad group of films that have a specific target, whether it be younger females, older females, younger males, older males, and so on.

And we're also doing something I alluded to called dynamic pricing, which we're starting to price our inventory not on a flight-by-flight basis, based on demand, but more on a week-by-week basis. We put in place some new technology and process that's allowing us to look much more carefully at the demand or the heat, if you will, on inventory in any given week.

So that's allowed us to go out with proposals that are much more reflective of the actual demand for a given week. And obviously, that does have some connection to individual films that may open in that week. But we won't allow them to buy just the impressions associated with a specific film.

All right. Thanks very much.

You're welcome. Thank you.

Thank you. Ladies and gentlemen, at this time, I'd like to turn the call back to Mr. Kurt Hall for closing comments.

Thanks, everyone. And thanks for your patience. I'd like to thank all of our teams here at NCM. They've done a tremendous job of staying focused over the last year. And I think the results of the fourth quarter, first quarter and our guidance for the second quarter, I think, reflect a great job, with an awful lot of distractions out there. I'm very proud of them, and I'd like to thank them as well.

Please let us know if you have any other follow-up from our comments today. And we'll be talking to you on our next call. Thank you.

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