National Cinemedia Inc (NCMI) 2015 Q2 法說會逐字稿

Good day and welcome to the National CineMedia Inc. 2015 earnings conference call. Today's call is being recorded. And at this time I'd like to turn the conference over to David Oddo, SVP of Finance for National CineMedia Inc. Please go ahead, sir.

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, in section 21E of the Securities Exchange Act of 1933 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 Company's filings with the SEC.

All forward-looking statements are expressly qualified this their entirety by such factors. Further, our discussion today includes 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.

Good afternoon, everyone. Thank you for joining us for our 2015 second quarter earnings conference call. Before we discuss our record Q2 operating results and our outlook for the remainder of the year, I wanted to first take a few minutes to talk about the implementation of the Chairman and CEO succession plan we announced earlier today.

As you have likely read by now, the Company's Board of Directors has retained executive search firm, Heidrick and Struggles, and will initiate a search for a new CEO. Once my successor has been appointed, I will retire as Chairman, President and CEO. At that time Scott Schneider, currently our lead director, will succeed me as Chairman of the Board, and I will continue in a 24-month consulting role as an adviser to the board and CEO to facilitate a seamless transition and consult on other business matters to drive future growth and shareholder value.

As one of the original founders of our Company nearly 15 years ago, the decision to start this formal succession process has not been an easy one for me. It's been an honor and privilege to lead NCM's talented and dedicated team from start-up through an exciting period of growth. After recoveries from some recent health issues, I felt it was important for me to reduce my day-to-day participation with our Company, so that I can spend more time with my family and have more time to pursue other business and personal endeavors.

Given NCM's recent strong financial performance and strengthening market position, now seemed like the right time to transition to the next generation of leadership. With our strong management team and staff and a strengthening value proposition relative to other video advertising platforms that have resulted in several quarters of strong [goal], we're well positioned for continued growth. With a meaningful investment in the Company, I look forward to continuing to work with the Company's board and leadership team to ensure a seamless transition of our leadership and help our Company continue to create value for our shareholders.

With that I would like now to spend our few more minutes discussing our record second-quarter results and color concerning ad market trends, progress against our business plan and future guidance. David will then provide a more detailed discussion about our Q2 results and provide some more details regarding our guidance for Q3 and full-year 2015. And then, as always, we will open the line for questions.

After solid growth in both Q4 2014 and Q1 of this year, the momentum continued into the second quarter of 2015 with record Q2 advertising revenue and adjusted OIBDA. Total Q2 revenue growth of 22% versus Q2 2014 was driven by increases in national and local advertising revenue, partially offset by decrease in beverage revenue.

Q2 adjusted OIBDA growth of 30% was better than we had expected due a late breaking national scatter market and a lower make good due to the strong June box office, as well as continue the cost containment. The decrease in our high-margin advertising revenue was the primary driver of our 340 basis point increase in Q

somebody were to 2 adjusted OIBDA, margin versus Q2 2014.

The increase in Q2 national revenue was due to a meaningful increase in inventory utilization and higher CPM. This higher cell through an CPM recovery reflect the combined impact of last year's successful national up front campaign, and our week-to week dynamic pricing strategy that allowed us to capitalize on strong market demand throughout the quarter. The meaningful CPM recovery after a Q1 decrease, reflected multi-flight packaging of up front commitments that provided lower pricing in the lower demand first quarter and higher pricing throughout the remainder of the year, including Q2 scatter pricing that increased approximately 37% versus Q2 2014 scatter pricing, and approximately 30% over Q2 2015 non-content partner up front pricing.

Based on current bookings, we are also expecting an increase in both Q3 national utilization and CPMs versus a weak Q3 2013. Our successful up front strategy and strong scatter demand also drove the continued broadening of our client base. So far this year, we have added 33 new national clients with 19 different industries, with 17 of those new clients spending during the second quarter.

This is ahead of the 2014 pace when we had added 28 of the total 48 new clients that were added for all of 2014. The new 2015 national client additions added since our Q1 call in May included businesses in the colleges and universities, computer software, home video equipment, movie studios, personal care, pharmaceutical, quick service restaurant, sporting goods stores, toys and games, and video game categories.

While this is great progress, there are still hundreds of national brands that spend on video that have not yet used our network. After posting record Q1 revenue, our local and regional advertising business posted another record in Q2 with revenue growth of approximately 7% versus Q2 2014.

This quarterly growth is expected to reverse in Q3 due in part to a very difficult 2014 comp, as our Q3 2014 local and regional revenue grew 16% over Q3 2013. There are also several clients who ran regional campaigns with us in Q3 of 2014, who expanded their buys to national campaigns in 2015.

We also continued to fill sales positions that had been left open for Screenvision personnel, and have lost a few sales people to the stronger job market. With the growth of our network over the last few years, and our desire to improve our local and regional sales efficiency with a new proposal in inventory management systems that are being developed, over the last few months we have begun to upgrade the quality of our local sales and sales management personnel and make changes in the structure of our local sales organization.

These changes that we expect to be implemented by the end of the year will reduce the number of average theaters covered by each account director and the number of account directors managed by each regional vice president. This is meant to provide better sales coverage of individual theaters and provide more time for the management of account directors with our new equipment.

Despite the expected local revenue decline in Q3, after a strong first six months and expected return of growth in Q4, we currently expect full-year 2015 local revenue growth of low to mid-single digits versus full-year 2014, as our local and regional advertising business should continue to benefit from a strengthening economy and strong value proposition versus local TV affiliates, newspapers, radios, and billboards. Consistent with the growth of the online and mobile business, we experienced strong online and mobile revenue growth for the first six months of 2015, versus the same period in 2014, and expect growth to continue in the second half of the year.

While online and mobile remains a relatively small part of our total national advertising revenue, our strength of packaging, the strategy, rather, of packaging our in-theater inventory with our online and mobile inventory is important as it provides marketers a unique way to connect with the attractive movie-going audience, before, during and after the movies.

The ongoing expansion of our national network and new inventory management and targeting systems we are developing continue to improve our competitive positioning across all of our ad businesses. As a result of the addition of several high quality regional circuits, and new net theater additions by our founding member circuits and existing affiliates, at the end of the second quarter, we had 20,115 network screens, an increase of 264 screens or 1.3% versus the end of Q2 2014.

While we currently have network coverage in 187 of the 210 TV DMAs, we plan to continue to aggressively expand our affiliate network in new and existing markets to improve our geographic coverage and overall reach. In addition to the previously announced Cinetopia Theater circuit connected to our network this past April, and Santikos theaters that will join our network in Q1 2016, we have recently agreed to five-year extensions with nine of our existing affiliates, increasing our attendance weighted average affiliate contract term to over six years.

Including our founding members, our attendance weighted average contract term across our entire network is approximately 20 years. This improvement and broadening of our network and increase in our overfall advertising revenue has continued to benefit our affiliates, as Q2 revenue share pavements to them have increased nearly 20% per average screen versus Q2 2014.

With this strong growth in affiliate payments and the high quality entertainment experience our first look pre-show provides to theater patrons, I'm confident that we will continue to add new theater circuits to our network in the future. We also continued to improve the quality of our network for the benefit of our advertising clients. 100% of our network screens now utilize digital projectors with approximately 85% of our screens featuring the higher quality digital cinema projectors.

And approximately 97% of our network attendance now receives our first-look pre-show over our digital distribution network. This broader network connection, combined with the increase investments we are making in our technology, and in the theater audience and other consumer data sources, will allow us to further shorter campaign lead times, begin to create more targeted ad campaigns and provide more robust data analytics about those campaigns.

The 2015 investments we announced last quarter to accelerate our inventory management and targeting systems development is progressing slightly ahead of schedule, and in the coming weeks we will announce several new relationships that will provide us access to deeper theater audience data and other consumer data to feed our new data management platform.

This new DMP and related inventory management systems will allow us to provide marketers the expanded audience targeting and data analytics capabilities that is becoming a necessity in today's evolving video advertising marketplace. Looking ahead to the rest of the year, our strong Q3 revenue and adjusted OIBDA guidance reflects significant Q3 national revenue growth over Q3 2014.

This will more than offset the projected decrease in Q3 local and beverage revenue. Our Q3 national inventory sell through has approached sellout levels in July and August, and scattered CPMs are again trending meaningfully higher than Q3 2014 and at last year's non-content partner up front CPMs. Due to our strong finish to Q2 and expected Q3 performance, we are only modestly increasing our full-year revenue and adjusted OIBDA guidance rating until we see how much of our current up front campaign will contribute to our Q4 2015 revenue.

While there has been good Q4 activity as buyers look for high quality video alternatives, and due in part to the strong film schedule, including Star Wars in December, it is still too early to project the impact of our current up front campaign on our Q4 results and full-year 2016. Projecting the impact of our up front on Q4 is made even more difficult by the fact that some of our client commitments cover the broadcast TV calendar, beginning October 1, 2015, and some are for calendar 2016.

While the up front -- the key to the up front process has moved at a slower pace than usual, as advertisers look for more flexible terms and evaluate whether to hold back money for the scatter market, our up front process is moving a bit faster than last year. It appears that the success of our up front campaign, higher recent scatter CPMs and tighter inventory has created more interests and making up front campaigns to our network than in the past. In fact, we have already locked in content partner commitments for 2016 that are 8% above 2015, including three new relationships and we'll still have one GPG package left to sell.

We have also finalized one of our courtesy PSA packages for 2016 and 2017, and renewal talks with our other PSA partner are progressing well. If you recall, we booked the majority of our 2014 -- 2015 up front commitments in the post Labor Day through early October time frame, as advertisers reallocated a portion of their broadcast and TV up front commitments to other video platforms, including ours.

While we had finalized more commitments than at this time last year, we are once again expecting several deals to be finalized after the broadcasting cable up front processes are completed, and we are currently anticipating increases in both CPMs and dollar volume versus last year's up front. Our goal for this year's national up front commitments continues to be in the range of 70% to 75% of our 2016 annual national targets.

Given our healthy Q2 and Q3 scatter market with over 30% average CPM premiums over last year's non content up front pricing, along with a significant dollars being held back in the TV up front, we believe this allocation of inventory to the up front is the best way to maximize the value of our national inventory and our 2016 revenue.

Consistent with last year you can expect a more detailed update on this year's up front campaign during our third quarter call in early November. Given the current trends in the TV business, and building cynicism about the efficacy of online and mobile platforms, 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.

That's all I have for now, so I'll now turn the call over David to give you more details concerning our Q2 results and Q3 and annual guidance.

Thanks, Kurt. For the second quarter our total revenue increased 21.6% versus Q2 2014, driven by a 30.4% increase in national advertising revenue, excluding beverage, and a 7.4% increase in local advertising revenue, partially offset by an 8.2% or $800,000 decrease in beverage revenue.

Total Q2 adjusted OIBDA increased 29.6%, and adjusted OIBDA margin increased to 55.5% from 52.1%, reflecting an increase in high margin national and local advertising revenue, that was partially offset by the decrease in 100% margin beverage revenue. For the first six month of 2015, total revenue increased 16.6% and adjusted OIBDA increased 27.5%. An adjusted OIBDA margin increased to 47.9% from 43.9% versus the first six months of 2014.

We also recorded $800,000 of AMC rave and Cinemark rave integration payments for the second quarter versus $600,000 in Q2 2014. You should note these integration payments are added to adjusted OIBDA for debt compliance purposes, but are not included in our reported revenue and adjusted OIBDA, records 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 our founding members during 2015.

Our Q2 2015 advertising revenue mix shifted due to the higher national growth, to 74% national, 19% local, and 7% beverage versus Q2 2014 that was 68%, 22%, and 10%, respectively. The 30.4% increase in Q2 national ad revenue, excluding beverage versus Q2 2014 was driven by a 20.35% increase in impressions sold and an increase in CPMs of 10.6%.

The increase in impression sold was driven by an increase in inventory utilization to 133.3% from 122.9% in Q2 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 up front marketplace. This increase in impressions sold was also driven by a 9.3% increase in our network attendance that benefited from the strong Q2 box office.

Our quarter-end make good balance increased to $1.8 million from $1.3 million at the end of Q2 2014 due to the higher Q2 2015 revenue, partially offset by the unexpected strength of both Jurassic World and Inside Out in June. For the first six months of 2015, national ad revenue, excluding beverage, increased 21.6%, driven primarily by an increase in utilization to 118.3% from 98.7% on network attendance that increased 3.3% and a 1.8% increase in CPMs versus the first six months of 2014.

Our Q2 local and regional advertising revenue increased 7.4%, driven by a 5.1% increase in average contract value and a 3% increase in total contract volume versus Q2 2014. The 5.1% increase in average contract value was driven by a 13.2% increase in the average value of contracts between $100,000 and $250,000, partially offset by a 17.6% decrease in the average value of contracts above $250,000.

The increase in total contract volume was driven primarily by a 2.2% increase in the number of smaller contracts below $10,000. Q2 beverage revenue decreased 8.2% versus Q2 2014, driven by the 14.4% decrease in beverage CPMs that is tied to our decrease in 2014 national segment one CPMs, offset by a 7.6% increase in founding member attendance that related primarily to the strong June performance discussed previously. Looking briefly at diluted earnings per share for the second quarter, we reported GAAP diluted EPS of $0.17 versus $0.06 in Q2 2014.

For the first six months of 2015, we reported GAAP diluted EPS of $0.02 versus $0.01 in the first six months of 2014. Excluding $34.3 million, that includes the termination payment and legal costs associated with the Screenvision merger during the first six months of 2015, and non-cash charges related to terminated interest rates lost in both Q1 2015 and the first six months of 2014, the first six months diluted EPS would have been $0.19, versus $0.04 in the first six months of 2014.

Our capital expenditures of $2.9 million or 2% of total revenue for Q2 2015 compared to $3.1 million or 3% of total revenue for Q2 2014. As Kurt previously discussed, we have accelerated the development of our inventory management systems and audience targeting to more effectively compete in the video advertising marketplace, and thus we continue to estimate that a full-year 2015 capital expenditures will be in the $13 million to $15 million range.

Moving on to our balance sheet, our total debt outstanding at MCM LLC, as of the end of Q2 2015, is $935 million versus $892 million at the end of 2014. This increase was due to a $43 million increase in our revolver borrowings that was driven by the payment of Screenvision termination fee and larger-related cost by MCM LLC, primarily in Q1 of 2015.

As discussed on our previous earnings call, our revolver balances will decrease by $25.5 million when the remaining merger-related expenses are reimbursed through a deduction in available cash distributions in the third quarter of 2016. Our average interest rate on all debt was approximately 5.3% at the end of Q2, including our $270 million floating rate term loan bank debt and revolver credit facility that had a rate of approximately 2.6%.

Excluding revolver balances, 69% of our total debt outstanding at the end of Q2 2015 had a fixed interest rate. Our consolidated cash investment balances, as of the end of Q2 2015, decreased by approximately $9 million to $69 million from the end of Q2 2015, with $63 million of this balance at NCM Inc. and $6 million at NCM LLC. Excluding tax reserves, and after the payment of the recently announced $0.22 per share dividend to be paid on September 3rd, 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 5.8% based on today's closing share price of $15.17. Our pro forma net senior secured leverage at NCM LLC, as of the end of Q2, was approximately 3.3 times, trailing four quarter adjusted OIBDA, which is well below our senior secured leverage maintenance covenant of 6.5 times. You should also note 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 has decreased to approximately 4.3 times at the end of Q2 2015 versus the end of Q2 2015.

And our consolidated leverage net of NCM Inc. and NCM LLC cash balances was 4.0 times at the end of Q2 2015. Turning to guidance. For the third quarter we expect total revenue to be in the range of $109 million to $114 million, and adjusted OIBDA to be in the range of $56 million to $61 million. This implies a revenue increase of 8% to 13% and adjusted OIBDA increase of 7% to 17%, versus Q3 2014.

These increases are driven by growth in our national advertising business, as Q3 national revenue is expected to increase approximately 26% to 31%, driven by increases in both utilization and CPMs versus Q3 2014. This Q3 national advertising increase is expected to be partially offset by an expected local advertising revenue decrease of approximately 13% to 17%, and approximate 19% or $1.7 million decrease in beverage revenue.

Full-year 2015 national booked and pending contracts remain strong and are currently 91% of the national advertising revenue implicit in the mid point of our updated full-year guidance range versus approximately 80% of our actual full-year 2014 national advertising revenue at this same time last year.

Our Q4 national booked and pending contracts are also encouraging, as they are currently 66% of the Q4 national advertising revenue, implicit in the mid point of our updated guidance range versus approximately 39% of actual Q4 2014 national advertising revenue at this same time last year. While we encouraged by these booking increases, recent strong scattered demand and progress from our current up front campaign, our gardens remain somewhat cautious until we better understand how much of this year's up front campaign will contribute to this year's Q4 results.

As such, for the full-year we are only modestly increasing our previously provided 2015 revenue guidance to a range of $425 million to $433 million and 2015 adjusted OIBDA guidance to a range of $215 million to $223 million. That concludes our prepared remarks and we'll now open the lines for questions.

Thank you. (Operator Instructions).

Our first question is from Eric Handler with MKM Partners. Please go ahead, sir.

Thank you, very much. Kurt, quick question for you on your up front strategy. Last year was the first time you went right to the buying agencies. You had a big deal with Omnicom. And just wondering this year are you having -- are you putting a little more emphasis on going to the buying agencies? Are you going -- are you sticking with the tried and true of going right to the advertisers themselves? And what's the dynamic there? And how has the Omnicom relationship worked out?

The Omnicom relationship has been fantastic. So that whole structure that we set up with them and the relationship has been really, really good. So our strategy going into this year has been pretty much the same. Talked to both agencies and clients. Some clients like their agency to do this, and some clients like to do it directly. So I think you can continue to expect a combination.

Okay. Thank you very much.

Okay. Thanks, Eric.

Our next question is from Barton Crockett with FBR Capital Markets. Please go ahead.

Okay. Great. Thanks for taking the question. Kurt, I'm sorry to hear you'll be leaving us in a bit, and it's been great to, you know, have you on these calls for so long and I look forward to the transition. But I wanted to ask about that transition, the search. Are you guys contemplating internal candidates or is the focus really on external?

It's going to be open to both, and I think we're going to cast a pretty broad net. And, you know, I do think that there will be opportunities both externally and internally. Don't have any real details to share on that. We actually haven't officially launched the search yet. We couldn't launch until we made this public, a little hard to go out and talk about our Company without people knowing exactly who it is.

Okay. All right. Now looking at the business a little bit. You know, I was wondering if you could give us a little bit of a sense of how your message is resonating now versus even a couple of months ago when you did your up front, given what seems to be, you know, a bit of a sea change in the attitude towards TV, just very recently. You know, as the TVs kind of ad environment weakens, is your inbound call volume kind of picking up?

Yes. There's clearly been a -- you call it a sea change. I would actually say that this change has been happening for a while. And I think we saw the first signs of it last year when you had the TV up front down for the first time in a non-recession period, maybe ever. And you've seen that again happen this year, so it's actually interesting watching the markets reaction the last few days.

It's like all of a sudden they woke up and everything changed. When, in fact, I think things have been changing for over a year and probably even before that. Clearly, you can see, Barton, from our numbers and some of the quotes that, you know, some of the info we gave you on CPM that we're seeing in the scatter market for us right now, there clearly seems to be a shift in media buyers' attention to things other than TV that has high-quality video.

And while there's a lot of new video impressions coming on to the marketplace, there is still not a lot of what I would consider very high-quality video. And, you know, obviously, that's what we have. We're sort of at the top of the food chain on that. And when you combine that to the other things I mentioned, you know, like viewability engagement and all of the other things that make our network and our venues so special, I really do think that we are an alternative to people who are looking at a lot stronger than they have in the past.

Okay. Great. And then if I could ask one last question here on the utilization. You know, I know there's been some discussion about expanding the number of ad slots available. You know, perhaps, it including some more back from your beverage arrangements and, you know, and finding other ways to expand the number of ads you're putting in there for the national advertisers. Can you update us on where you are and where you might get to next year with that percentage?

Yes. As we had maybe mentioned before, I think David mentioned it in some of his comments in January when we were giving guidance for the year, we adjusted some of our content partner deals for 2015 to reduce from two and a half minutes to two minutes of time that the content segments ran. So that allowed us to recapture three 30-second units, give or take two of those are used for national, what are those used for regional and local.

For 2016 we will recapture the other half, if you will, of the content partners as those deals have been redone. And that will add, you know, another, you know, 30 seconds. And so, you know, for 2016 you can pretty much assume a full 16 30-second unit sort of denominator at total sellout. And the utilization total, in the past we've talked about 127 as being total sellout. That happens to be 14 over 11. This year we talked about 137 I think or something like that, 136, which was 15 over 11.

And next year the total sellout utilization will be 145, which happens to be 16, 30-second units over the standard 11 denominator. So it does provide us quite a bit upside. It's inventory that, obviously, we can use, especially in some of our key months like May, June, July, August, November, December.

Okay. That's great to hear. Thanks for the color.

Okay. And thanks for your comments at the beginning.

And next we have Ben Mogil with Stifel. Please go ahead, sir.

Hi. Good afternoon. Sorry. Good afternoon, Kurt. You going to be running for the G.O.P. tonight and that's why you're leaving us?

No chance. That would be the last place in the world I'd want to be.

I hope you're feeling better, by the way. And like Barton said, I'm sure we'll all miss you for sure. So just wanted to -- I mean, I understand, obviously, the cautiousness around Q4 and not so much from an economic perception, but just trying to get a sense of where your advertisers are going to take their up front. You know, when the up front that they have committed to is going to be effectively spent. I wanted to realize that a little bit more. With most of the advertisers still kind of, or a decent chunk of them working off the TV calendar, because that kind of starts in September/October. Any reason to think that, you know, there wouldn't be a decent slug of the up front commitment trying to be spent in the fourth quarter, you know, just given the seasonality of the business?

Yes. The only history we really have is last year. And, you know, clearly, last year our fourth quarter was helped, you know, significantly, by our up front. And so I don't think there's anything we've seen so far that would indicate that it's not going to be the same. Again, I think some of our cautiousness is what you talked about before. These up front commitments are made and then you sit around for several months trying to figure out exactly where the money is going to be placed and which flights it's going to hit or which even weeks or months it's going to hit.

So that process will be continuing, you know, throughout the next few months and maybe even into late September, early October. That's what we experienced last year. Some of it will be tied to how quickly the cable guys can get their up fronts done. It sounds like the broadcast guys have pretty much wrapped up everything, and you all have heard from them over the last few days. Sounds like there's going to be a lot of money out there available for other folks.

I think the next step in that for us, anyway, how much gets committed to by the cable guys. And once that's all done, I think media buyers tend to sit there, at least what they did last year, sit there and say, okay, now where am I going to put all of this money I didn't commit to TV. And last year we did a very good job of picking up a pretty good piece of that, and I'm hopeful we can this year. We didn't want to get out ahead of ourselves.

That's great. Thank you. And then sort of, you know, when you look at -- so it fair so say because, obviously, the implied fourth quarter has some sort of margin compression. So is it fair to say, if, in fact, you get some more of the national up front money that will come a relatively high margin just given that national comes with a higher margin than the local dollar kind of thing?

Oh, Yes, Yes. There's no question, and you can see it in some of our second quarter numbers. Our margin increase, you know, the margins went up probably almost a full point just because of the share shift between national and local or for us from local to national. So, you know, obviously, it's a much higher margin business for us, probably, I don't know, 15 points to 20 points higher than local.

And are you finding the -- are you finding Screenvision to be relatively rational, if you will, on its pricing, etc., lately?

Yes. Look, I think the best way to characterize what we're seeing from them, and, again, we don't, obviously, have access to their business plans to know what they're thinking, but there seems to be sort of what I would call an all-boats rise approach. And, you know, we both I think are going to benefit clearly from some of the dynamics that are going on in the TV business. And it just seems to me that there's a fairly constructive all-boats rise and sort of approach.

And, fortunately, I think they're beginning to realize that the cinema, you know, quality of the cinema asset is pretty good right now. And that really what should be sold right now is, you know, not price, it should be quality. And right now is the time when TV, in particular, but even online is coming under a little bit of pressure on some of the best quality attributes of cinema. If you think about viewability being one of the challenges of digital, you know, that's one of our strongest selling points.

And if if you think about stable ratings, or even this year increasing ratings, that's, you know, that are affecting TV or knowing that your ad is going to be seen, that's some of our strongest value proposition points as well. So I do believe there's a pretty constructive all-boats rise approach being taken.

That's great, Kurt. Really appreciate it. And I'm not sure if you'll be on the next call but hopefully we chat soon.

Okay. Thanks very much.

And next we have Jim Goss with Barrington Research. Please go ahead.

Okay. I had a couple of things. One, you mentioned make goods, and I was wondering in the sense that you're dealing with make goods, what is expected is it -- are there restrictions in terms of timing as to when the replacement ads are placed, or is it just a method of delivering the CPMs you have promised?

There's an occasion when we'll go back, Jim, and the advertiser won't want the weight that we haven't delivered in the next month, which is generally what we do. And we've often made deals that those would get shifted to future months or even future years in some cases. But generally what happens is it just rolls over into the first couple of weeks of the next quarter.

And so it really is all about how many impressions we can deliver, and it really comes down to quite honestly the box office in the last two to four weeks of the quarter. And you can see in our numbers in the second quarter, you know, with Jurassic World and Inside Out being such strong June performers, that really helped us. And it brought our make good down to a very, very low level, relatively speaking.

You know, third quarter is a little bit more challenging in that respect, because September is not a big month with a lot of big films. So if you're running behind going into September, it's a little hard to make up the ground like we did, you know, maybe in June, because you have big films and a lot of attendance. So, anyway, you know, I think it's just mathematics associated with the impressions that we can deliver.

Okay. And how much is the blockbuster slate influencing rates? And how many months do you feel you have true pricing power at this stage?

Well, I don't know if I'd refer to it as pricing power, but and I do think that on the local side, the film mix probably helps more than it does on the national side. Although this year the heat around Star Wars, for instance, in the fourth quarter has got a lot of attention. The media business, apparently, has heard of that movie and does think it's going to be significant.

I also think we've benefited from the fact that our ratings have been relatively stable even in 2014, which was a down year, you know. Our ratings were still pretty stable. And they're going to be up in 2014. If you compare that to what's going on in the TV business, with ratings declining at alarming rates, in the case of some networks, all of a sudden, you know, our business looks like a pretty stable place to put your money.

So, you know, I think all of those factors are important. Clearly, it creates an overall tail wind for our business when the theater business is going well. We don't have to spend the first 10, 15 minutes of each sales call explaining to somebody why the cinema business isn't in secular decline, and, you know, that happens occasionally when we've had a bad run of film. It's, obviously, not happening right now, given, you know, the year and how it's gone. And looking out into 2016 and 2017, it looks like the film schedule is going to be every bit as strong as it was this year. So, you know, I think we're on a pretty good roll here.

Okay. And, Kurt, if you were just in the process of joining the Company at this point, do you think you would have any different set of priorities, given all that's taken place and you had a clean slate and then you might have at first or as evolved to this point?

That's a great question, Jim. It's one I have actually thought about over the last few months as you can understand. Look, one of the things for me that made me comfortable with starting the succession plan now, is that I'm really happy with the solid business strategy that we have in place. You know, most of it has been in place from the day we went public, really from the day the Company was formed.

And it was all about trying to steal share from other video platforms and for most of that time period it was TV. Now it's, obviously, digital as well. So that strategy continues to be at the core of almost everything that we do. And, you know, some of the recent announcements we've made about technology investments, clearly is a response to what's going on in the business.

I think to compete effectively with digital you're going to have to be a more targeted operation, and you're going to have to create more campaign analytics for your clients. So, you know, our strategy of continuing to do things to improve our value proposition, which is what I just described, increase the reach and scale of our network. You know, those two primary goals have always been in place, and they're still in place, and I think they are going to really drive the growth that we are going to show over the next few years. And, you know, as far as me, individually, is concerned I've never in 15 years $1 of advertising revenue.

So I'm not concerned about any of the changes that may be affecting me and the CEO of this company. We've got an incredible sales force, great operations and technology people and other people that help run our business on a day-to-day basis. And so, you know, that's why it just all felt right. We have got a great strategy in place. We have got great management in place, and it just seemed like the right time.

Okay. Well, I'll echo the thoughts others have expressed, I'll miss having you on these calls, so thanks. Thanks a lot.

Well, thank you very much, Jim. I appreciate it.

(Operator Instructions).

And we'll take our next question from James Dix with Wedbush Securities. Please go ahead.

Thanks very much. Kurt, all my best in the transition. I, like others, will miss your presence on the calls when that happens. I guess my question is kind of about how you're thinking about pricing going forward, you know, because when I think about the television network market, it seems like sports and some of the event programming is seeing stronger demand, and I think you've talked in the past about seeing cinema somewhat as a comparison, or, you know, as an event-type program, you know, that ads can be associated with. So over the next few years, should we be thinking about, you know, return to CPM growth, because you're going to start benchmarking against a market, which is somewhat diverging maybe from the prime time entertainment market?

Yes. I think I mentioned this before. I do think there is going to be a bifurcation of the video marketplace in this sort of high-quality, scarce event-like programming, sports probably the best example of that. There is some other event shows like the Academy Awards and others that demand high CPMs. I think we fall into that category clearly.

And then you're going to have an awful lot of video impressions that are of the lower quality version. Lots and lots of YouTube inventory I think falls into that category. And so I do think that over time, as, you know, premium inventory and non-premium inventory sort of bifurcate. I do think there will be, you know, the opportunity for increased pricing.

I think from our standpoint, pricing is really all about creating demand and getting our inventory utilizations up. And I think, you know, clearly the success of our up front strategy has helped in that respect, going into any year. 70% to 75% sold, I think is a really good place to be to create the right kind of inventory pressure in the marketplace.

And all the bundling that I talked about, I think has done a good job of getting our utilizations up, in some of the lower demand or traditionally lower demand periods, because we're able to leverage some of the more high-demand inventory in that packaging. So all of these things I think are going to help continue to get CPMs up.

We're still in the process of figuring out, you know, the trade-off between what we should price up front inventory at versus, you know, the scatter markets. As I mentioned, you know, we're getting scatter CPMs now that are 30% higher than what we priced the inventory during the same time period in our up front last year. So that, obviously, tends to push you back to maybe not doing as much in the up front. Having said that, I really do like the 70% to 75% range. I do think that creates that pricing equilibrium where we'd really like to be.

Do you see the up front as kind of the benchmark as to where you're going to be pushing the CPMs? I mean as you sell more of your inventory does that really become more of the centerpiece of what your pricing strategy is going to be for any given year?

I don't know if it will be or not. It's a little harder with our business, especially in that we don't have as much history on this as, say, TV networks do. We also don't have anywhere near the amount of inventory. So what we've seen is, you know -- and this 30% increase I just alluded to, is we don't -- when we go into the year and we get to any given month, we don't have a lot of inventory left to sell so -- if we've done a good job in the up front

So with the lack of inventory, if you will, you, obviously, have more pricing pressure can be applied to it and you can see what you've -- you can see the result in that 30% number I talked about. The other thing that we're doing, and this is some of the new systems we're developing that's able to do, is being able to price our inventory week-to-week is really interesting. And it's actually been part of the reason you're seeing some of the numbers, because from one week to the next, based on film schedule, you could have very significant swings, 30%, 40%, 50% even in differences in pricing for that inventory week-to-week.

So the ability to do that and really start to zero in on what the real demand is at that point in time has been a real big deal for us. And, again, I think it's resulted in some of the CPM increases that you're seeing.

Great. Thanks very much.

Thank you.

(Operator Instructions). There are no further questions in our queue. I would like to turn the call back to Kurt Hall for closing (inaudible) and additional remarks.

All right. Thanks, very much. I just want to, you know, echo some of the things you guys said to me, and I just want to go right back at you. It's been great, you know, having the relationships and, hopefully, they won't just completely go away. I'm not going away for a while anyway, but it's been a real pleasure working with you.

I didn't always agree with your price targets or your recommendations on whether to buy or sell or hold our stock, but you always were really, really fair with us. You always listened. And I really do appreciate that. So I'm sure we'll be talking over the next few months and maybe even on the next call. So thanks very much.

Ladies and gentlemen, that does conclude today's presentation, and we appreciate everyone's participation.