National CineMedia, Inc. (NCMI) Q2 2009 Earnings Report, Transcript and Summary

Greetings, ladies and gentlemen, and welcome to the National CineMedia, Incorporated second quarter 2009 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Otto, Vice President of Finance for National CineMedia, Incorporated. Thank you. Mr. Otto, you may begin.

Good afternoon. I’d like to remind our listeners that this conference call contains forward-looking statements within the meaning of Section 27A of the Security 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 company’s filings with the SEC. All forward-looking statements are expressly qualified in their entirety by such factors. Now I’ll turn the call over to Kurt Hall, CEO of National CineMedia.

Thanks David. Good afternoon everyone. Welcome and thanks for joining us for our second quarter 2009 earnings call. Today I’ll be providing an overview of our second quarter operating results and an update on the marketplace. Gary Ferrera our CFO will then provide a bit more detail on our financial performance for the quarter and will provide specific guidance for Q3 2009 and the full year. And then as always we will open the line for questions. We are pleased to report another quarter of growth in a difficult marketplace. Today, total Q2 2009 revenue increased 7.2% versus Q2 2008 and our Q2 adjusted OIBDA increased 5.8% over 2008. Our revenue growth reflected continued national market share gains and more than offset the effect of lower revenue across the rest of our business. Most notably as expected our beverage revenue declined 6.6% as a result of the reduction in time required in our founding members’ circuits to fulfill their reduced time obligations to Coke. This decrease in beverage revenue combined with higher network affiliate costs contributed to our OIBDA margin decline. Our national advertising revenue excluding beverage increased 21.5% as we benefited from higher allocation of content partner spending in Q2 2009 versus Q2 2008, and expanded our client base as we continued to improve the quality and reach of our national network. Non-content national partner advertising revenue excluding beverage grew 8.7% in Q2. Improvements in our network, most notably the addition of AMC Loews circuit that strengthened our coverage in the larger DNAs, are clearly aiding our strategy to broaden our client base. Several new clients are buying our network for the first time in 2009, including clients in the QSR, packaged goods, sports apparel, import auto and telecommunications categories. We are also starting to see interest in the…

Thank you, Kurt. I will now spend some time reviewing our second quarter financial performance in a bit more detail, as well as provide guidance for Q3 and full year 2009. You should note that the Regal Consolidated integration payment is not included in our operating results as those payments are recorded directly to our balance sheet. The Regal Consolidated integration amount was $800,000 for the second quarter of 2009 and $1.1 million for the first half of 2009. Including the final payment specifically related to the AMC Loews theaters in Q1, total integration amount for the first half of 2009 totaled $1.2 million. As Kurt mentioned, we had a great second quarter especially considering the current market environment. We outperformed our guidance range due to some very late breaking scatter dollars, some which came as late as the first week of June. For the second quarter our total revenue grew 7.2% to $92.9 million. Total advertising revenue increased 11.6% to $83.5 million, while meetings and events revenue decreased 21% to $9.4 million. The advertising revenue mix shifted in favor of our national business for the second quarter of 2009 and was approximately 70% national, 18% local and 12% beverage versus 64%, 22% and 14% respectively in Q2 2008. Q2 national ad revenue excluding beverage grew 21.5% driven by a utilization increase to 81.3% compared to 66.2% Q2 2008, across an 18.3% increase in our Q2 impression [base]. While CPMs decreased to 6.2%, the strong Q2 2009 box office combined with the inclusion of a full quarter of AMC Loews attendees contributed to the larger number of saleable impressions over Q2 2008. As discussed on previous calls, the time required for beverage advertising by two of our founding members in 2009 was reduced from 90 seconds to 60 seconds. This…

Thank you. (Operator Instructions) Your first question comes from Alexia Quadrani - J.P. Morgan.

Just to follow up on your commentary about the vertical. I guess there are some clients that are pushing spending into 2010 or pushing back significantly on pricing. Is that limited to certain verticals? Have you seen that more pronounced in one or two verticals or is it across the board?

The comment that Gary made was really specific to one client, and it happens to be in the military category. So it’s really not something we’re seeing across the board. As I indicated we are obviously seeing a much softer pricing environment out there, so that’s pretty much across the board. But with respect to the comments that Gary made with the delay in spending that was one specific client.

I think you mentioned in your opening about how you were seeing some new clients that were previously Screenvision customers that are coming to you, could you talk a bit about, I guess, how maybe their customer base maybe by vertical differs from yours? I guess is it dramatically different or not really? And maybe what kind of opportunities you can see going forward in terms of the new vertical penetration.

Well, clearly the nature of our network somewhat dictates, you know, the kind of clients you have. And I think clearly our network is much more [e-county] focused so there’s clearly times when clients that want more C&D county coverage will either buy us both or even, you know, in some cases buy just Screenvision. So I think the real nature if you will of the network itself sort of dictates that. But clearly, you know, I think both of us attract clients that are 18 to 34 focused because that’s obviously a big percentage of the theater going audience.

And when you look at I guess the verticals that you’re beginning to penetrate that you highlighted that aren’t really what your core verticals historically, is there one or two that you really think could be as significant or core vertical down the road because they have expressed really an interest in sort of moving their ad dollars to theater advertising?

Yes. Look, we’re getting good pick up from everybody. As I said many times, a lot of this just has to be with sticking to the blocking and tackling of the sales process and getting more and more customers familiar with cinema, comfortable with your creative, comfortable with their execution in this new platform. I think specifically some of the interesting bright spots we’re seeing in the technology category, that’s been pretty interesting. Yes, and we’ve seen some good pick up in the sort of family restaurant area. So you know clearly those have been client categories that we have not [inaudible] action with until now.

And just one last question, I’m sorry, I didn’t quite understand what you meant when you said you weren’t included in the process for Screenvision. Does that mean you haven’t been involved in it yet or you don’t think you’ll be involved in it?

The comment was based on we haven’t been involved with it yet. It’s a little hard for me to speculate whether we will or won’t.

Your next question comes from James Marsh - Piper Jaffray.

I have a couple of questions here. First you mentioned that you renewed your content partner deal. Were there any major changes in the structure of that deal or is it similar to what it was before?

There are a few changes and I don’t generally want to talk about the specifics of our contracts with them, you know, but the basic overall structure was somewhat similar.

And then could you just talk a little bit about the competitive environment overall with Screenvision today? And then just at the last a housekeeping item, if you could just quantify, you know, bigger than a breadbox the Idea Cast investment.

I think the competitive environment with Screenvision has not really changed since the day we started. You know we both compete in a very big marketplace and we’re both trying to shift market share from the television and other national mediums into our network. So, you know, I wouldn’t really characterize the competition as anything different than it has been.

And then Idea Cast, can you give us a sense of what that investment was?

It was a reasonably small one and got a little bigger this year obviously because we invested in the restructuring that I discussed. But it’s still pretty immaterial in the scheme of things.

Your next question comes from George Hawkey - Barclays Capital.

I just had two. The first is in a typical year, how closely correlated to the television up front is the marketplace for cinema advertising? And relative to this year, is it sticking close to that or is it as expected? And then secondly, given that the National Amusement Theater chain is on the block, if it’s picked up by one of the founding members how many screens does that represent as a potential pick up?

I’ll answer the last part first. I think the National Amusement circuit is somewhere in the neighborhood of 1,000 or so screens in the U.S. So I guess that’s the total potential. As far as the correlation, I’m not quite sure I fully understand the question. Clearly we have seen the up front begin to move more rapidly over the last couple of weeks. I don’t think it’s quite done yet, but it’s a lot further along than it was two weeks ago. We’re clearly, you know, seeing or at least hearing about roll backs in CPMs and some more significant were the smaller networks and so, you know, that sort of goes to my comment that I made before on the softer CPM pricing environment, which is clearly out there. There also appears to be a reasonably meaningful amount of money that’s being held back. In other words, the total dollar spending on the up front seems to be down and the numbers vary all over the place. But it’s a reasonable amount of money. You know I think in the past we’ve sort of viewed that as being somewhat positive. That means there’s more money in the marketplace to compete for, the scatter marketplace. You know obviously we’ll have to wait and see whether that money actually comes back in the marketplace in the form of scatter dollars. It generally does, but I think a lot of that will be dictated by, you know, the speed at which the economy recover and/or clients faith in that actually happening. So I think all things considered, you know, more money in the scatter market is a good thing for us.

Your next question comes from Ben Shapiro for Ben Mogil - Thomas Weisel Partners.

I just have two questions. First, I know you alluded to this earlier on the call. I was just wondering if you could give us any additional color around recent trends in CPM for local or national radio and TV and how that’s impacting your business specifically.

Well, you know, as I mentioned in my comments the overall marketplace is very soft from a CPM standpoint and like most of the media business it’s all supply and demand oriented. So when you have a big category say like the car category that stops spending money, that obviously has an impact on the overall marketplace. I would say that we’ve seen soft CPMs pretty much across the board and obviously reflected in our numbers as well.

I remember from last quarter I think auto and military were holding up okay. Are you still seeing strength in those categories or?

Yes. The auto was actually one of our strongest growth categories in the second quarter. Most of that, but not all of it, but most of it was Asian auto companies. So we’re still seeing quite strong pick up in the auto category. I’ve already mentioned that, you know, the military they did spend in the first quarter with us. They have told us they plan to spend in 2010. The remainder of 20090 spending that I referenced before is looking somewhat doubtful.

And telecom was pretty strong.

Yes, telecom was very strong in Q2 as well. That’s a good point, Gary. Thanks.

It was kind of noisy in the background and I didn’t hear correctly. When you were referring at the end of the call to what percentage of bookings you had, I think it was in the 80% range compared to the 90% last year?

Yes, 81% versus 92%.

Your next question comes from James Dix - Wedbush Morgan Securities Inc.

I just have two questions for you. First, as you look towards 2010 are there any categories which you’ve kind of been chipping away at during this downturn where you think you could get some, you know, upside surprise in terms of spending? And then second, I guess it goes a little bit to kind of quarterly variability. From time to time you’ve indicated that given the relatively small number of national spots you have, if you have a late cancellation sometimes that can lead to some quarterly variability. Do you have any strategy going forward as to how to reduce that? Or is that just a function of broadening and deepening, you know, the overall advertiser base?

Clearly that’s our primary strategy because with more clients that are buying your medium obviously the portfolio [kick] theory kicks in and you’re not as open to issues of somebody canceling or moving their ad. So that’s obviously the primary strategy. But we’re also building relationships with a number of different clients. They’re referred to in some cases as airplane deals. But we’re trying to build relationships where we can get commitments from people and we can actually place that inventory when there’s inventory available. Obviously that is at a fairly significant CPM discount, but it still is a strategy that television has used very effectively. The other point I’ll make is that the one thing that television has been very reliant on over the last six to nine months is the direct response money. We really don’t deal in that industry at all. And it’s one of the strategies quite honestly just because of the quality of that content and the nature of the content. It’s not available to us and it’s been a big factor for television over the last few quarters. There was one other part of your question. Oh, the other part was the potential new categories. Yes, there’s a number I think we have hope for fairly significant growth in the future. You know we continue to pick away at the packaged goods category. You know there’s some obvious big spenders in that category, big client names and we’re continuing to work very closely with those clients and making some progress. And hopefully we’ll have, you know, continued progress and breakthroughs in 2010. The insurance category we’ve sort of started to break through in that. I mentioned before the casual dining category, we’re starting to break through in that. So financial a little bit. I guess that’s part of the insurance category. So, you know, we are, you know, we are making really good progress. And as I’ve mentioned before, you know, we continue to grow some of the more traditional categories like the car category.

I’ve just got one follow up on that. I think you mentioned in the past some of the new categories might be more price sensitive than some of the categories you had on in the past. Do you think the dynamic of having Screenvision out there as a competitor has any impact on the ability to expand new category base in the sense that my understanding is they typically, you know, appeal more to a lower CPM?

There’s clearly going to be times where we’re just going to pass on a deal because we don’t like the deal or we’re fairly well sold, or we think we’re going to be fairly well sold. You know the whole decision on whether you take a deal that you may think is lower price is based on where you stand at that point in time. How long do you have before the flight runs, how much inventory you have available, all of those factors are very important. And then of course the category because there’s clearly certain categories, you know, generally buy television for instance at a lower CPM than other categories. And obviously as I’ve said before if we get into a point where people are making commitments to us where we’re able to place the inventory wherever we want, there will obviously be a lower CPM associated with that, you know, consistent with the way it’s bought on television.

Your next question comes from Barton Crockett - Lazard Capital Markets.

I was curious about the comment that you mentioned about, you know, advertisers being interested, you know, perhaps in seeing more C&D networks on top of the A&B networks. You know markets where you guys have been strongest. And that makes me think about Carmike and the possibility of, you know, them joining your network at some point. You know they’re a big Screenvision partner right now. Can you comment on that? You know is there some possibility there? You know some eventuality where you think they could become part of your network?

Well, Barton, subject to the existing agreements that people have with Screenvision I think, you know, we’re going to be looking at most everybody that has a significant number of theaters. So I’m obviously not going to comment on any specific circuit and you are right, that Carmike does provide a lot of C&D county coverage. Now I just want to be clear, you know, we still have a lot of C&D county theaters. Clearly our concentration is much more focused in A&B counties. And generally and, you know, the military for instance is a very good example. They usually buy both of us and Screenvision because they want coverage across everything.

And then as it sounds like you’re interested and continue to be interested in growing your affiliate network, is there a meaningful group of theaters that you think just do not want to be with National CineMedia because of your close tie to the top [sweet] theater chains and the idea that they’d be aligning with competitors in that instance?

You know I know that used to be the old thought and, you know, there probably are still a few out there that don’t like it. But I think at the end of the day what most exhibitors express is they want to just try to maximize the revenue potential for their advertising business in the future. But at the same time they want to make sure that what they’re putting in front of their audience is very, very high quality. And so, you know, it’s one of the reasons that we have focused so much attention on making the first look very high quality. And so I think the combination of obviously increasing income and making sure that they take care of their patrons, I think those are the two things that people look at the most. We also get, you know, a lot of interest in our Fathom network because that’s incremental revenue as well. So to the extent that a relationship with us in advertising leads to some alternative content going into their theaters, I think that’s a good thing for the circuits as well.

I wanted to ask a question about your guidance. You know, you guys, I was in print, you know, with estimates that you guys would beat the high end of your revenue and EBITDA guidance. You actually ended up beating my guidance here in the second quarter, yet you’re coming in with guidance for the full year that if anything suggests some easing some of your previous view that you could approximate last year’s revenue and EBITDA. Is there something that’s changed in your view of the second half that makes you more cautious now than you were a quarter ago? Or are you just, you know, continuing to layer in some conservatism in your guidance?

Well, in Q2 as we mentioned on the call in the script we had some late break and scatter pop up, as late as the first week of June. Which as you can imagine is something that we just didn’t typically have before. So we, us putting that into our estimates would have just been, you know, irresponsible to try and to get to where the quarter came out. So, you know, we did when we made our Q2 estimates have some additional revenue in there that we hadn’t yet booked. We just didn’t have as much as came in because of that late breaking scatter. And when you look at Q3 and Q4, Q3 late breaking scatter, you know, will again hopefully some of that will come in and we have projected some of that in there. You know, not an incredible large amount because obviously it’s August versus June and people away, so we may not see as much. When we’re looking into Q4, you know, it’s a very big quarter for us in the year. And we’re still quite a ways out and when we said, you know, we’re 81% booked and pending versus 92% there is still a ways to go. So the guidance range we’ve given we feel pretty comfortable with. Business, it’s all related to where the scatter comes out.

Yes, I will tell you the one client that we’ve now learned is likely to shift their spending into 2010 where we had thought previously that that spending was going to be in fourth quarter, that clearly has shaded our view a little bit. As we mentioned on our last call, that client had still not committed at that point in time and so we raised it on the last call because it was something that could vary our numbers in the fourth quarter. Now the good news is that we’ve got a lot of time between now and, you know, November and December in particular. In the past those months have been very high demand months. So, you know, we’re hopeful that our sales team will be able to get out there and sell it out.

I’m not sure I heard it correctly. What was the number that that client was expected to spend that was pushed into next year? Was it $2.8 million? Was that the number?

We didn’t actually tell you. I think what Gary had said in his comments was how much that client spent last year, in September through December.

And what was that number?

I think it was $18 million.

Your next question comes from Torin Eastburn - CJS Securities.

Most of my questions have been answered already so I just have two quick ones. Gary, you mentioned there could be some downside risk to the guidance. Do you think of downside as the lower end of the ranges you’ve given or?

Yes, that’s what I mean. You know we put a wider range than we had last year just because of the visibility, and it not being as great in Q4. So we are pretty comfortable with the range we’ve put out. And if things go well, we hope to be in the high end range. And if the scatter market doesn’t materialize, you know, we’d probably be towards the lower end.

And then with the Department of Justice kind of continuing to be aggressive in terms of investigating and prosecuting cases, does that change your thinking at all about Screenvision?

No.

Your next question comes from Richard Greenfield - Pali Research.

You know when you look at your, this is kind of a follow up on the last question or two questions ago. You know there has been a real decrease in visibility in terms of how far out people are booking. I mean you know one of the questions we just asked on a CBS call that, you know, where supposedly scatter’s pretty strong at least that’s what they’re saying, but the comment is that, you know, people don’t want to commit in the up front process because they just can’t commit far out anymore and they want to buy closer in, and that’s going to help scatter. And so given the fact that scatter is materializing later, it is possible, I just want to make clear, it is possible that you could outperform your prior guidance including this guidance and be above that range if you saw the same type of demand come in late like you saw in the second quarter. I know there’s obviously issues in terms of content partners shifting, but there is the potential if scatter is strong that you could do quite well versus the current range that you’re giving out. That’s question one. Question two, is the reason that you’re excluded from the Screenvision process related to anti-trust or is it simply, you know, you think they’re waiting to see how National Amusement’s plays out? Or is this UBS doesn’t like you for some reason? And then lastly, are there any remaining content partner deals that need to be re-upped over the course of the next year? Thanks.

I’ll answer the last one first. The answer’s no. We’re firm with everybody now through 2010. There will be some contracts that we’ll be trying to renew for ’11 and ’12 at this time next year. So the way we’ve laid those out approximately give or take, three of our content partners are in one series of two years, three are in the other and, you know, every other year. So that answers that question. The excluded from the Screenvision thing, you know, look I’d be speculating, Rich and it’s always good not to speculate. We have heard that the owners are, you know, concerned about the anti-trust issue. We obviously have a different view but that doesn’t mean that we’re right or they’re right. So I think there’s also probably the possibility that it brings more interest into the process if we’re not there. Again I’m just speculating. And then the visibility, look, anything’s possible. Clearly the last couple of quarters we’ve been able to exceed even our upper end of our range because of the late breaking scatter. You know the other thing as I mentioned a few minutes ago we’ve got going for us is that November and December have been historically very strong quarters. You know last year we stopped selling fourth quarter, you know, very early because we were so heavily sold. And in some cases I know we did turn some money away, and I’m sure there’s some money that we never saw just because we weren’t sort of accepting any new orders. So, you know, anything’s possible. I just think in this business environment it’s prudent to, as we have done, create a reasonable range where if the scatter market doesn’t materialize we’re at the lower end. If it does materialize, we’re at the upper, you know, to use your words “if things go incredibly well, could we exceed that?” Yes, of course. But again I think as we have in the past we’re really trying to give guidance that we think we can achieve or exceed.

I don’t want to beat a dead horse, but when you look at Screenvision is being owned by a financial buyer or someone else in the industry other than its current ownership structure, meaning not owned by National CineMedia, but is that better for you? Does it impact your thinking at all? Is that a good or bad event?

Well, you know, depending on what kind of capital structure they put in place and the pressure they have on generating higher CPMs and, you know, other things that they may do, you know, I sort of look at it on a neutral basis. As I said in my comments, we’re going to continue to pursue other theater circuits. Obviously if we were able to acquire Screenvision, that process would be a different process. But at the end of the day, it doesn’t really alter our thinking all that much.

Your next question comes from Barton Crockett - Lazard Capital Markets.

I just had one other thing I wanted to come back on. You know based on some of my text, it looks to me like you’ve actually had very strong sell outs in July and early in August. And I was just wondering if that corresponded to what you’re seeing and if perhaps there’s a real skew here between, you know, the utilization, you know, perhaps going up year-over-year and the CPMs coming way down, or whether you’re seeing kind of a reduction in the seller rates as we get into later in August and September?

Look, the business has been quite good. And so I don’t think that, you know, there’s any doubt about that. I think clearly as we indicated last year and we’ve indicated already, last year’s third quarter was extraordinary. So, you know, everything kind of went right. So, you know, could that still materialize this year? Sure. But I think, you know, your checks I think were consistent with what we’re seeing. Clearly the variation in our numbers over the next six months are going to be driven primarily by utilization. You know clearly there’s going to be lower CPMs as we indicated, but the big, the big swing if you will is going to be our ability to sell more of our inventory. We have plenty of inventory. Even with a great second quarter of over 80% utilization, that still means we’ve got a lot of inventory left. And remember that 80% utilization is only calculated on 11 32nd units.

And we’ve got up to 127% that we need to hit.

Yes. Yes. Mathematically 127% would be sell out, because we actually can go to 14 32nd units, and, you know, we’re only using 11 right now. We’ve got the extra Coke unit that we got back which makes it 12. And then we will oversell occasionally both segment one and segment two, so that puts us as 14. So when you do the math at 11 over 14, that happens to be 127%. So we’ve got enough inventory to meet demand. That’s, you know, that’s something that’s good.

Your next question comes from Eric Handler - MKM Partners LLC.

As we look out to the back half of the year your local business was relatively stronger than most for local. Is that down 6.5, 6.6%, is that sustainable in the back half of the year or could we see improvements or should we see something more in line with the other local businesses? Gary Ferrera: What we’re thinking, Eric, for the second half of the year is that the local business will be pretty much in line with last year to slightly up. Now that means on a per attendee or per screen basis it’ll still be down because we have more screens than attendees. But we think, we’re projecting and assuming that it’ll be sort of on line with last year to slightly up from last year.

Eric, as you recall, business activity in October pretty much shut down. And so our fourth quarter followed for the local business, followed what many businesses did. So we’re going to have, you know, somewhat easier comps in our local business, clearly a lot easier than our national business in the fourth quarter, because the shutdown of the economic activity affected our local business pretty directly.

Ladies and gentlemen, there are no further questions. I would like to turn the floor back to management for any closing remarks.

I really don’t have anything to say but thanks and, you know, I’m sure we’ll be talking to some of you with follow up questions after the call. All three of us will be here, so if anybody does have any follow up questions, please call. And thanks for everyone’s support and we’ll talk to you next quarter.

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