National CineMedia, Inc. (NCMI) Q1 2013 Earnings Report, Transcript and Summary

Greetings, and welcome to the National CineMedia, Inc. First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Oddo, VP of Finance and Interim co-CFO for National CineMedia. Thank you sir, you may begin.

Good afternoon. I'd like to remind our listeners that this conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. All statements other than the statements of historical facts communicated during this conference call may constitute forward-looking statements. These forward-looking statements involve risks and uncertainties. Important factors that can cause actual results to differ materially from the company's expectations are disclosed in the risk factors contained in the company's filings with the SEC. All forward-looking statements are expressly qualified in their entirety by such factors. Now I'll turn the call over to Kurt Hall, CEO of National CineMedia.

Thanks, David. Good afternoon, everyone. Welcome, and thanks for joining us for our 2013 Q1 earnings conference call. Today, I will provide a brief review of our Q1 results and make some comments about our progress against our key strategic focus areas. David will then provide a little more detail about our Q1 financial results and guidance for Q2 and full year 2013. And then as always, we'll open the line for questions. Before we get started, I wanted to update you a little on our CFO search. We've had a very positive interview schedule over the last couple of months. While the process is taking a little longer than I had anticipated, we continue to meet with several high -- very high-quality candidates and are beginning to narrow the search down to a handful of candidates that have the combination of financial and strategic skills I'm looking for. The good news is given my financial background and the great job that David and Jeff Cabot, our Controller, have been doing, there's really no pressure to make a hasty decision. I wanted the right person who will help me and the rest of our management team develop and drive our strategy. Now onto our Q1 results. Once again, we exceeded the top end of our adjusted OIBDA guidance range with solid 17% adjusted OIBDA growth for the first quarter as both our national and local advertising businesses exceeded their revenue targets, and we continue to maintain high or tight cost controls. Our total revenue grew only 4% as our advertising revenue growth of 11% was offset by a 34% decrease in our lower-margin Fathom Events business, primarily related to the Q1 2012 wind down of the business meeting division. The first quarter national revenue growth was driven by an increase in CPMs of nearly 11% and a 10 percentage point increase in inventory utilization associated with 3 primary factors: higher Q1 content partner allocations, the addition of 6 new national clients that helped offset some normal spending churn and the continued expansion of our theater network through the addition of new network affiliates. These positive factors were offset somewhat by approximately 10% lowered cinema industry attendance compared to the record Q1 2012. During the first quarter, our sales teams continue to make good progress on our strategy to expand our client base and secure more Upfront commitments. We've already added 11 clients for 2013 that have never spent with us or have not spent since 2006. These new national clients included businesses in the import auto, medical, telecom, insurance, movie studios, Internet sites, prepared foods and transportation categories. The quarter also included spending from our new content partner, Microsoft. Their participation in our content partner strategy is noteworthy as it is a first for a non-media company. Our content partner strategy that is just one part of our broader strategy to secure client commitments early, served us very well in Q1. The other key part of our strategy to secure more client commitments in advance is our participation in the TV Upfront process. This strategy also is progressing well. Excluding our content partners and beverage commitments, so far this year, we have booked Upfront yields with clients in the retail, QSR, insurance, military, home video and import auto categories that resulted from the efforts of our 2012 Upfront and possibly even some of our early 2013 Upfront meetings. This process of sitting with clients during their planning phases allows us to match our inventory availability throughout the year and pitch strategic creative integrated ideas that differentiate our network from our video platforms directly to agency planning teams and senior client decision-makers. As a result, we better match our inventory availability and strong network selling proposition to the marketing needs of brands, including creating more flexible pricing structures and incentives during lower-demand periods. So far we have seen stronger interest and momentum leading into our 2013 Upfront as we have held over 200 Upfront meetings with clients and agencies since the 2013 process began late last year. This will be the second year that we have presented during the television Upfront Week in New York City. Guillermo del Toro, the director of this summer's Warner Temple film, Pacific Rim, will be our keynote speaker. Even though this is only our second year of a multi-year strategy, we have already made progress raising the awareness around cinema advertising as an important part of the media mix. Interestingly, Screenvision's first Upfront presentation last week was a very positive event for us, as well as it provided more cinema voice in the broader media marketplace. While our go-to-market approaches are different, the message is the same: Cinema should be an important part of any brand marketing mix. All of this positive PR and hard work by our sales, PR, marketing and research teams has led us to an increase in our national commitment levels that David will discuss later. Our local advertising business had another strong quarter as revenue increased over 20% for the second straight quarter in a row. The turnaround that began last summer as the result of the hard work of our local and regional sales teams and the addition of new network affiliates that are now fully integrated into our digital network and sales processes. This better geographic coverage across key DMAs makes our network much more attractive to larger regional clients. These positive sales trends are expected to continue as our total 2013 local and regional bookings are currently up 24% over 2012 at this same time last year, and we are projecting to have solid double-digit local revenue growth in Q2. While still a small part of our total advertising revenue, our online and mobile initiative continues to be an important part of our integrated bundling strategy that helps drive incremental on-screen buys. In fact, excluding content partners, so far this year, we have commitments for approximately 21 million of on-screen or lobby advertising contracts that also include an online or mobile component versus 8 million at this same time last year in 2012. This integration strategy combined with a 14% increase in Q1 local online sales were the primary drivers of the 83% increase in overall online and mobile ad revenue versus Q1 2012. With online and mobile campaigns becoming an increasingly important part of brand marketing budgets, we continue to aggressively pursue our strategy of connecting our big screens with the online and mobile worlds. Our Cinema Sync app provides a unique consumer engagement and promotional tool for our theater circuit partners and ad clients by creating a wireless platform to distribute coupons, content and other value-added items to the cinema patron smartphones while they watch the FirstLook preshow. In addition to being able -- to be available in the Apple and Android online stores as a standalone app, Cinema Sync is available as part of our Movie Night Out app that has now been downloaded by 1.8 million users. The distribution of Cinema Sync is being further expanded through the integration with various movie-related apps, including those of certain of our founding member circuits. Our Q1 Fathom Events revenue decreased $4.3 million or 33.6% versus Q1 2012 due primarily to the wind down of the business meeting division in Q1 2012 and a decrease in the number of consumer events held to 19 versus 25 during Q1 2012. While the number of consumer events declined, revenue per consumer event increased almost 14% due to our focus on higher-quality and higher-margin events. While the cost savings from this restructuring of the business, the impact of the lower Fathom Events revenue on our overall Q1 operating income was only around $400,000 versus Q1 2012. The Q2 Fathom Event pipeline looks promising with several successful franchises on the schedule, including a strong met title and a live Mayweather fight and a “Wait, Wait…Don't Tell Me!” and Star Trek events. As mentioned previously, the continued expansion and improvement of our national digital network continue to benefit the competitive positioning for both our national and local ad businesses. So far in 2013, we have signed 3 new affiliate theater circuits with approximately 215 screens and 6 million annual attendees, and we continue to have promising discussions with several other smaller regional circuits. As of March 28, 2013, we had 19,292 total screens in our network, representing a 1.1% or 219 screen increase versus the end of Q1 2012. Our founding members have also been very active with transactions involving individual theaters in the Great Escape, Rave and Hollywood theater circuits. In total, our founding members have acquired or have announced the acquisition of 110 theaters with 1,453 screens since Q4 of 2012. While 95 of these theaters with 1,214 screens were already part of our network and thus will not expand our reach or impression base, the higher margin theater access fee structure with our founding members will increase our future operating margins. We expect an adjusted OIBDA benefit of approximately $7 million on a full-year basis. You should note that the benefit expected in 2013 will be lower depending on the timing of the closing of these acquisitions. This benefit is already implicit in our 2013 guidance. It's important to note that 15 Rave theaters with 239 screens and approximately 10 million annual attendees that are not currently part of our network will automatically move to our network over the next few years when their Screenvision contract expires. We currently expect to receive approximately $2 million of integration payments in 2013 as compensation for the NCM, LLC units issued related to those acquired theaters that are not yet part of our advertising network. We also continue to improve the quality of our network with 97% of our attendance now part of our digital satellite network. Currently, over 15,000 of our network screens feature the new high-quality digital cinema projectors, representing over 80% of our network attendance. Looking ahead, our late Q2 national scatter activity has been very strong and in fact, we're beginning to have issues handling demand in June. And as I mentioned earlier, our local regional business continues to perform very well. With a strong Q2, we are now projecting that our first half adjusted OIBDA will be 12% to 18% ahead of first half 2012. While this is a great start, I continue to be concerned about the tough Q2 -- or 2002 Q3 comp. While we have built a meaningful cushion through the first half of the year and our Q4 national bookings are slightly ahead of last year, it is going to be very challenging to replace the approximately $20 million Q3 2012 campaigns we ran for one of our telecom clients. Having said this, the third quarter for the last several years has been our highest demand quarter, and I'm hopeful that we can carry the late Q2 momentum into Q3 as we begin to benefit from some of our Upfront and other strategies to broaden our client base and expand our theater and online and mobile networks. These strategies appear to be well timed to capitalize on several macro trends in the media marketplace, including programming and reach fragmentation and the proliferation of the DVR and other ad-skipping technology. Our broad national reach and the unique engaging environment of the cinema with no ability to skip ads ensures that our clients' ads are being seen and creating maximum brand and product awareness. Thus, our core selling proposition has never been stronger. That's all I have for now, and I'll now turn it over to David, our interim co-CFO, to give you some more details concerning our Q1 financial performance and both Q2 and annual guidance.

Thinks, Kurt. For the first quarter, our total revenue increased 3.9% versus Q1 2012 driven by an 11.2% increase in total advertising revenue, including beverage, partially offset by a 33.6% decrease in Fathom Events revenue. Total Q1 adjusted OIBDA increased 17.3%, and adjusted OIBDA margin increased 400 basis points to 35.4%, reflecting an increase in advertising revenue to 90% of our total revenue versus 84% in Q1 of 2012. It is important to note that our adjusted OIBDA and adjusted OIBDA margins would have been meaningfully higher if it were not for approximately $900,000 in noncash marketing expenses related to our Q1 client outing that were a carryover from a 2012 barter deal. Our Q1 2013 advertising revenue mix shifted towards local and was 70% national, 18% local and 12% beverage versus Q1 2012, which was 69%, 16% and 15%, respectively. Q1 national ad revenue, excluding beverage, increased 12.9% versus 2012 driven by a 10.8% CPM increase and an increase in utilization to 86% compared to 76.4% in 2012. These increases were partially offset by an 8.5% decline in our Q1 attendance related to the weaker slate of films versus the record Q1 2012, partially offset by the addition of new network affiliates. The CPM increase was driven by an increase in content partner spending during the quarter as the Q1 2013 content partner allocation was approximately 25% of their 2013 annual must-spend commitments versus the Q1 2012 allocation of approximately 12% of their 2012 annual commitments. This highlights the importance of securing commitments in advance and allows for more scatter inventory availability in our higher-demand CPM quarters. As the box office was stronger for the last few weeks of the quarter, our quarter end make-good declined to $800,000 from $1.2 million at the end of 2012. Our Q1 2013 local revenue increased 22%, with same screen sales increasing approximately 17.2%. Our Q1 local contract volume increased 13% and average contract value increased 6.1% versus Q1 2012. This was driven by an across-the-board increase in the volume of both larger regional contracts and smaller local contracts. The total dollar value of contracts under $100,000 increased 15% and a number of these smaller contracts increased 13%, while contracts over $100,000 increased nearly 50% and a number of these larger contracts increased 22%. Looking briefly at diluted earnings per share, for the first quarter, we reported a GAAP EPS loss of $0.02, which approximates Q1 2012. Excluding noncash charges for derivative items related to our terminated swaps in both 2012 and 2013, GAAP EPS would have been $0.00 versus a loss of $0.02 in Q1 2012. Our capital expenditures were $2.7 million for the first quarter compared to $2.4 million in Q1 2012, or approximately 3% of total revenue for both periods. We continue to estimate that 2013 CapEx will be in the range of $10 million to $12 million or approximately 2% of total annual revenue. This estimate assumes that no additional network affiliate agreements are signed this year. However, there are ongoing discussions with several smaller circuits that could increase our impression base and planned capital expenditures. Moving on to our balance sheet. Our total debt outstanding increased as of March 28, 2013, to $879 million from $821 million at the end of Q1 2012, primarily due to the funding of approximately $63 million in swap termination payments during 2012 related to the refinancing of our bank debt to capitalize on favorable debt market conditions. Our revolver balance net of NCM LLC cash was approximately $3 million at the end of Q1 2013 versus $62 million at the end of Q1 2012, primarily due to revolver paydowns from our 2012 term loan and bond refinancings and net collections of receivables. Earlier this morning, we announced the closing of the repricing of our term loan and revolving credit. While this transaction upsized our term loan by $5 million to $270 million to pay transaction expenses and further reduce our net revolver balance, the reduction in the LIBOR spread on our term loan of 50 basis points will lower our annual cash interest payments by approximately $1.2 million. The November 2019 term loan maturity and covenant structure will remain the same. We also reduced the borrowing spreads in $110 million of the $124 million available on our revolving credit by 25 basis points. Due to our low-average revolver balances, this will not result in significant interest expense savings unless our future working capital needs increase with the continued growth of our network. Subsequent to this refinancing, based on current LIBOR levels, our future annual cash interest expense will decrease to approximately $49 million including revolver interest payments. You should note that approximately 70% of our debt is fixed and not affected by changes in LIBOR rates and our current average interest rate on all debt has been reduced to approximately 5.5%, including our $270 million floating-rate bank debt at approximately 3%. Our consolidated cash and investment balances at the end of Q1 increased by approximately $15 million to $99 million as of Q1 2013, including an NCM, LLC balance of $11 million. Approximately $15 million of the $88 million of cash held by NCM, Inc. is reserved for income tax payments and tax receivable agreement payments to the founding members. Thus excluding these tax-associated reserves and the $0.22 per share Q1 dividend that we announced this afternoon, we would be able to pay approximately 5 additional quarters of dividends even if no additional cash were distributed up to NCM, Inc. from NCM, LLC. Our Q1 dividend that will be paid on May 30, 2013, to shareholders of record on May 16, 2013, represents an annual yield of approximately 5.5% based on today's closing share price. Our pro forma net senior secured leverage at NCM, LLC as of March 28, 2013, remained at approximately 3x trailing 4-quarter adjusted OIBDA, which is well below our senior secured leverage maintenance covenant of 6.5x. You should note -- you should also note that while we have no NCM, LLC total leverage or NCM, Inc. consolidated maintenance covenant, our total net leverage at NCM, LLC was approximately 3.9x, down from 4.0x at the end of 2012 and our consolidated leverage, including NCM, Inc. cash balances, was 3.5x down from 3.6x at the end of 2012. Turning to our Q2 guidance and annual outlook. For the second quarter, we expect total revenue to be in the range of $117 million to $122 million and adjusted OIBDA to be in the range of $58 million to $63 million. This implies adjusted OIBDA growth of approximately 9% to 19% versus Q2 2012, primarily due to the strength in both our national and local advertising businesses and the positive impact of our founding member acquisitions. With respect to our annual bookings and outlook, our booked and pending national advertising revenue, including content partner, beverage, cellphone PSA and scatter contracts, are approximately 73% of the national advertising revenue implicit in the midpoint of our full year guidance range versus 70% of our actual 2012 national advertising revenue at this same time last year. These national bookings are up approximately 7% or $17 million on a total dollar basis, but you should note that the record campaign placed in Q3 2012 was not yet booked at this same time last year. We continue to expect total revenue to be in the range of $455 million to $465 million and adjusted OIBDA to be in the range of $225 million to $235 million as we believe that our strong first half will be partially offset by the lower national revenue in Q3 due to the record campaign. Though it is too early to predict the fourth quarter, our national bookings are up slightly, and we're hopeful that our Upfront strategy and a more stable economic environment going into Q4 will provide a more favorable selling climate than in the past 2 years. Also, given the historically strong Q3 market demand and the fact that we turned some business away last year, we are hopeful that we can get close to our 2012 Q3 national revenue level. That concludes our prepared remarks, and we'll now open the lines for your questions.

[Operator Instructions] Our first question comes from the line of Eric Handler with MKM Partners.

This morning, from a big picture perspective, we've seen a number of companies beat the advertising expectation. So corresponding with what you're saying that the advertising market is stronger than expected right now, I'm just curious in terms of demand, is it pretty widespread across all verticals? How are you thinking -- how is this working in the shoulder period versus what is normally your stronger periods? And then also, just curious with your Cinema Sync app, how big is your user base for that at this time?

Eric, this is Kurt. I would say the scatter market is pretty strong. It seems to be late. Things are a little stickier right now than we would like, and our second quarter jump in guidance that we've talked about is really because of that very late second quarter, so I'd say May and June, June in particular. So we're seeing that demand that we've seen in the past in the summer months against the bigger films, so that still seems to be the case. Although our first quarter, as we noted, is getting a little bit better. And as far as client mix, I think we're seeing some strength across the board. The usual suspects, the import auto, the entertainment companies, the technology companies, they've all been very strong. But we are making some progress, as I noted in my remarks, where we had some Upfront commitments by some new clients and some new categories that we haven't historically done a lot of business with. Cinema Sync, right now we have, as I mentioned in my comments, there's 1.8 million people that have it in their hands as part of the Movie Night Out app. I don't have a number in front of me, Eric, I can get back to you later on how many people have actually downloaded it from the stores directly as a standalone app. And as I mentioned, we expect over the next few quarters for the numbers to increase dramatically as it starts to be integrated into some other folk's moviegoing apps.

Our next question comes from the line of Townsend Buckles with JPMorgan Chase. Townsend Buckles - JP Morgan Chase & Co, Research Division: Kurt, on your guidance, given your Q1 came in ahead and it looks like a strong Q2 is in the works with improved pacings, is there anything later in the year you're seeing outside of the Samsung comp that held you back from raising your full year guidance? Or should we see this as just staying conservative at this point of the year? If I'm doing the math correctly, it looks like the implied second half guidance is for revenues and margins to be around flat to down.

Yes, your read is correct. I think -- obviously that one big comp in that one contract is something that we're very, very focused on. I'd say the only other thing that continues to lead to some conservatism on our part is we've been burned the last 2 years in the fourth quarter by the economic environment falling apart going into the fourth quarter selling season. So we're always a little weary of things that have happened to us 2 years in a row. And as David mentioned in his comments, if that doesn't happen and we have a strong economic outlook going into the fourth quarter, we'd expect fourth quarter to be stronger. So that could provide some upside. Townsend Buckles - JP Morgan Chase & Co, Research Division: Thanks. And on your pricing gains in Q1, could you give a sense of how you're scatter pricing trended just excluded the lift from the content partner mix? And on your comments of demand picking up, we've been hearing from the TV companies as well that the pricing in scatter has been very strong. So do you see this as maybe an opportunity to drive pricing yourself? Or is it more a benefit to just have a narrow CPM gap to attract more spending from TV?

Yes, I mean, clearly, our content partner allocations being high in the first quarter helped our CPM. I wouldn't say that the scatter CPMs vary that much. You may recall last year, our scatter CPMs were down 11%. So we basically kind of got back to, I guess, scatter pricing that was sort of 2 years ago, first quarter of '11. So we continue to be very aggressive obviously in these shoulder periods, January through April and October with our pricing and incentives and other things that we're doing with clients. And obviously, to the extent clients are going to commit several flights throughout the year, we're obviously going to give them a better deal in those lower demand months. Townsend Buckles - JP Morgan Chase & Co, Research Division: So you'd say it's a benefit to have the TV stronger to just kind of have a closer gap for you?

Yes. Clearly, it's always better to have the floor on our pricing be higher, and I would consider TV pricing clearly a floor whether you want to look at broadcast or cable depending on the month, but it's always better to have that. Maybe what's going on here right now is that with all the rating declines, maybe people have just started to move some of their spending to other things because they just can't get it placed reliably with TV because of the rating declines. You also maybe, as I mentioned in some of my comments, starting to see some of the impact of the ad skipping and fragmentation that we know is impacting the broader TV marketplace right now.

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

I wanted to just follow up on the local ad trend that's very strong here in the first half. Do you see that local strength continuing into the third quarter? So, you've got a tough comp in national, but do you see big strength in the third quarter and maybe continuing into the fourth quarter?

Yes, in I think David's comments or mine, I guess it was mine, I said that our bookings right now for the year are up 24%, so that's really across all quarters. And so you can take from that, that third quarter is going to be very strong as well.

Okay. And then just again -- not to put too much on the guidance here, but you guys -- your revenues came in near the midpoint of your guidance, but the OIBDA was much better. Could you get more specific on what -- was it variance versus what you were thinking when you initially guided?

Yes, some of it, I think, was the Fathom numbers. I mean, that's the biggest, obviously, decline in the first quarter and what impacted our overall growth. I mean, you can see the difference between our advertising growth of 11% and the Fathom decline at 33% kind of netted out to a 4% increase in the first quarter. So clearly, there are some things going on there. And then there were some cost savings in -- that obviously impacted our EBITDA positively in the first quarter that was not implicit in our guidance. We're always obviously watching costs very closely. First quarter is one of those quarters that are a little harder to budget on cost standpoint because you don't fill positions as quickly as you've budgeted for and other things happen that allowed you to bring costs down for the quarter.

Our next question comes from the line of Ben Mogil with Stifel. Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division: So I just want to make sure I got this right. When you're talking about the founding member deals and the $7 million EBITDA benefit, when you gave guidance for the year, was that already in that number?

Some of it was, but we can't -- we couldn't predict when we gave guidance for the year when, for instance, the Hollywood deal. At that point in time, obviously, it was still in place. So we couldn't predict that Regal would get that closed at the end of the first quarter. We obviously couldn't -- can't predict when the Rave theater deal that Cinemark's working on is going to close. So we had some benefit already implicit in our numbers, and it continues to be. Whether or not that will be higher than or lower than what we projected will depend on when these things get closed. Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division: And is that $7 million figure, is that in totality or is that only -- so that's in totality. Okay.

Yes, that's in totality. The number for 2013 will be millions of dollars lower than that. Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division: And then on that same point, with the integration payments, are they tied to the Regal portion or to the -- they are tied to the portion that Cinemark bought, right?

Yes, well, Cinemark and AMC, both of them bought Rave theaters that will not be part of our network for a few years. Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division: So you will start, I guess, in the second quarter recording integration payments as a separate line item, is that correct?

I think we're going to record a few in the first quarter as well, and I think if you look at our filings, there are some there as well. Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division: And that's basically 100% margin revenue, right?

Correct. Yes, and it doesn't actually go through our P&L. It gets recorded directly to the balance sheet, so it's an adjustment that we usually make on top of whatever our recorded adjusted EBITDA is. Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division: Any feedback that you can share from this Screenvision Upfront? I mean, obviously, it was their Upfront, not yours, but it's a small market and I think you've got friends who work there too. So what kind of feedback were you getting, not on Screenvision per se, but on the general view of advertisers towards cinema? I mean, are you still seeing it move in the direction you want [indiscernible] was there anything -- was them having an Upfront where they didn't before and you're having one helpful to the growing larger pie, if you will?

Absolutely. I mean, I mentioned that in my comments. I think any time you have an additional voice in the marketplace talking about the sector that you're in, I think that's good. And I think Screenvision -- I did not obviously get invited to theirs, but from what I heard, they did an okay job of selling cinema and selling the positive attributes of cinema, and that is always good for us. Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division: Okay. Great. Then one very last question. $49 million for the cash interest expense for the year going forward, what's the overall GAAP number, stripping out your derivative losses and all that kind of good stuff?

So what are we going to add to that? $2.5 million for the amortization -- let us work on that, we'll get right back to you. I haven't got the number in front of us.

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

So 2 quick questions here. First, just a follow up on that Screenvision Upfront discussion, and I understand all the benefits to the broader cinema advertising industry. But I think one of the things that they were talking about was actually giving demo guarantees to advertisers. And I was just wondering, does NCM currently do this, or would you be planning to do that as well? And then just the follow-up just relates to the 3D slate, which was a little bit more robust this year, and I know in the past you've talked about being able to command higher CPM for 3D deals, and just hoping to get an outlook there for 2013?

The first question is we do not as a general policy matter. Obviously, there are certain types of buys that we will give more of a guarantee than we might otherwise. Buys that straddle several flights are easier to manage from the standpoint of demo guarantees than an individual one buyer or one flight scatter deal. So clearly, this is something that we've been talking to buyers about for a very long time. The fact that we in the past have always guaranteed against ratings, there's always been an aspect of this in our existing structures. This is obviously a little bit more focused, if you will, or targeted. But we didn't get -- if you do it occasionally and you do it across multi-play buys, it can be managed. I think the danger is, of course, that you start doing that on every individual buy. I think that gets very difficult to manage from the standpoint of the small amount of inventory that cinema deals with or has available relative to the amount that TV has available. I think it's also more difficult at times to predict what the demographic mix of any given film is going to be. Whereas in the television business, they have a very good idea, through a lot of different channels, about what the demo of a given show is going to be. The cinema business, the film business is much different from a prediction standpoint than the TV business in this respect. So it's something that we're being very, very careful with. What was the second part of your question?

The second one was related to the 3D slate?

Yes, the 3D slate looks reasonably strong. I would say 3D advertising has kind of hit a threshold, and I've never thought that this was going to be a huge growth potential for us until television got their act together. Clearly, the whole 3D television launch, if you will, has been a bust. And there's really no 3D television ads to speak of that are being created. So we continue to do the occasional 3D ad here and there, but I don't see it as a huge growth prospect for us until the TV -- 3D TV platform gets to critical mass. So I'm -- look, anything that brings more people into the theaters, whether it's big screen formats or 3D formats or just great films, it's all good for us.

Our next question comes from the line of Liang Feng with Morningstar Inc.

My question regards to the incentives that you mentioned earlier during the call regarding a more flexible pricing structure during lower demand periods. Are these incentives mostly taken up by your traditional client base? Or are you mostly pitching them to some of your newer clients?

Generally, it's category-specific and first-time clients. And the incentive isn't just around pricing. I mean, we do research sometimes for clients that we will pay for, and there are other things that we can do occasionally. We'll do screenings for them. There's lots of ways that you can create incentives for people. It isn't just about the CPM. Having said that, there's clearly some categories that if we want to try to expand them, we're going to have to create different pricing structures for those categories because they are used to spending money on TV at much lower CPMs than our average.

And has your strategy changed at all regarding how much pricing you're willing to give up during some of your higher-traffic periods to ensure more stable pricing during the lower-demand periods?

No. Generally, the pricing is being marketed as pretty firm during the high-demand periods. I mean, like what we're seeing now in June, and July and August historically, those periods -- there really isn't any need to discount because the demand is so high. And in fact, as I mentioned in my comments, we're now in a situation in June that a lot of people are getting shut out of our network just because there isn't room. That's obviously a very good message to send to the marketplace when we're in the business of convincing people to get their commitments in Upfront or earlier than they have in the past.

[Operator Instructions] Our next question comes from the line of James Dix with Wedbush Securities.

Just 2 things. First, in terms of the Upfront, I know you're planning on your presentation later this month, your second inaugural, I guess your second big one. How is the interest that you're seeing by category different this year versus the same time last year? I know some of the networks have talked about strength in particular categories. I just wanted to know whether you're seeing any changes in terms of who seems to be interested. I know it's still a little bit early, but any color you could give there. And then any update as to how much you think the Upfront could potentially mean to you in terms of your forward commitments going into next year. How much that's going help you in terms of the amount of business you have on the books heading into 2014?

Well, our responses to the invitation would indicate that there is strong demand or desire to come to the event across the board. And I think the thing that is different is the second year, we were able -- this being the second year, we were able to get into the process much earlier. As I mentioned, we were able to start meetings in the fourth quarter of 2012, which is when the process really gets going for the TV networks. Last year, we really didn't get into the mix until sort of mid first quarter, if you will. And so that's obviously been a benefit. But I think just the press that we got last year and just the fact, again, that Screenvision got into it this year, all of that is just very good news because it raises the -- raises everybody's attention towards cinema, and we become more of just the mainstream mix for media planners. As far as the results, as I've said many, many times, this is a multi-year process. I think our ultimate goal, I'd like to be in the high 60s, low 70s going into any year. That would be our multi-year goal. That's pretty consistent with where the larger cable networks are. I don't think we'll ever get to the 80-plus percent that the broadcasters are. I actually don't think, given the amount of inventory we have, that's in our best interest necessarily because we have a lot more risk, then, of obviously missing the marketplace should it be stronger. So I don't really have -- other than the data that we already gave you, I really don't have any metrics I can share with you on that.

Okay. And in terms of the types of advertisers, or any particular sense as to particular categories who were -- seem more interested last year, who seem to be standing out in terms of the discussions you're having in kind of those pre-upfront discussions. Any particular [ph]...

Yes, I haven't -- look, I haven't examined every single receipt of our invitation yet. But like I said, the fact that it's kind of across the board and it's not just the usual people from the autos, and the entertainment companies, and telecommunications companies, and military, and so on that have been sort of stable, larger clients of cinema, the fact that there's a lot of other clients that are interested in coming and learning more about the cinema medium is obviously good news.

Great. And then my second one just concerns the local regional growth. Are you seeing going forward any different set of drivers? I know over the past year, so you've seen particularly good contributions from the regional part of that buy. Do you see that dynamic changing much as we go forward in the year?

No, look, regional is going to continue to be a real big growth engine for this business, and a lot of that's being driven by the expansion of our network, the better coverage that we have in individual DMAs or states or any other regions that people may look at buying. Obviously, tourism boards and insurance companies, they buy by state, and tourism boards generally do all of those kind of clients that are looking for better coverage in DMAs or across states. As we continue to fill in the markets through our affiliate strategy in the acquisitions of our founding members, all of that helps a lot. The thing that I think is a little bit different so far this year than has been over the last year is we are seeing some pretty good uptick from the local, smaller businesses. And the only thing I can say about that is it just appears as though the economy, being stronger now for a longer period of time, has convinced these smaller businesses that they should start to spend and start to once again try to grow their businesses. I think we're also seeing business formation pickup and they -- the net of business formation versus businesses going out of business is now positive instead of negative. If you looked at the net new business curve, if you will, it was a bell curve that peaked out in '06 or '07 and went in a steep decline really through 2012 before it started to turn around where the net of new business startups versus bankruptcies, if you will, or businesses going out of business is now positive. That's good for us because when businesses start their businesses, they're looking to launch interesting campaigns, they're looking to create awareness for their new business, all that is very, very good for us. We're also, I think, benefiting from just getting all of the theaters we brought on to our network in '11 and '12 fully integrated in the sales process, fully staffed with trained and experienced salespeople, and we're starting to see the benefit of that as well. I think clearly in our -- some of our projections maybe in '12 in particular, we probably overestimated the time -- or underestimated, rather, the time it would take to get those screens and those salespeople up to full ramming speed, and I think we're there now.

Okay. Just a follow up on that, so generally speaking, it takes maybe a little longer to ramp the local efforts on the new screens as opposed to the national where you're just kind of flipping a switch and adding in the new impressions?

Yes, no question about that. There's a couple of things. A, just getting the salespeople in place, getting them trained, getting them familiar with their areas -- their trade areas. But it's also, we have to transition if these screens happen to have been in Screenvision's network prior to us taking them over, the local placement is different in their preshow than it is in our preshow. And so getting people comfortable with the placement and the structure, if you will, of our preshow sometimes takes some time and sometimes clients just say, "I don't like that placement," and they stop for a while and then they notice maybe their sales are going down or that cinema is really an important part of their marketing mix and they come back.

Our next question comes from the line of Jim Goss with Barrington Research.

A couple of things. I was, first, wondering are the -- the new clients you identified or suggest you were getting, are they tending to fall into new categories or the existing once you've been working on?

Well, a little bit of both. I mean, we're getting to a point now where there isn't really such as thing as a "new category." So we've said in the past what our target categories are to try to expand QSR, CPG, retailers and so on, and we're starting to see some good movement. I mentioned a couple of those categories in my Upfront comments. So I mean, I just think it's getting broader and broader overall client base, and we're still nowhere near what a TV network would be, but we're making progress.

Okay. And as you approach this Upfront, is there some Upfront discount for advanced commitment that you're -- you have in mind in order to secure that annual situation and get to that high 60s, low 70s type reach you're talking about?

So we'll obviously not going to talk about our individual strategy or tactics in a call like this. But it's -- I think it's safe to say that when advertisers buy in the Upfront, they expect a benefit for doing that. And whether that benefit is being able to place their inventory across their marketing plans on an individual flight basis or whether that happens to be a little bit better price or a better price in certain times of the year than other times of the year, all that's part of the back and forth of the process.

And are you trying to mirror what the networks do in terms of, say, guarantees and schedule allowances and cancellation potential to create a similar type of structure?

I would say there are some similarities. But as I said before, we're being very careful on the demo guarantee idea that is out there and obviously, has been a part of broadcast and cable for a long, long time. There are some cancellation rights and it will vary per deal. And obviously, the more dollars and the more flights people commit to, there's obviously a lot more things that we're willing to work with.

Okay. And lastly, I guess is, it sounds encouraging that you're getting spillover into the third quarter because second quarter is such a tough ticket, basically. Is that starting to help offset the tough comp that you've outlined that should therefore help any potential CPM softness in that quarter?

Well, I don't think there's any CPM softness in the third quarter. That's never been an issue for us. That's always been one of our stronger demand quarters, and it follows its stronger CPMs because of the demand. So I'm not sure where you were going with that. But clearly, being sold out the way we are in the back half or the back part of Q2 is a good thing and hopefully, we can get some of those clients to move into Q3. Having said all that, the $20 million amount, that one contract in Q3, is a tough nut.

Our next question is a follow-up question from Ben Mogil with Stifel. Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division: I was wondering if you just have that answer on the interest expense from a GAAP perspective.

Ben, this is David. It's about $2.5 million to $3 million a year. I think with our new refinancing, we'll lay a little bit more on there. It's all deferred loan cost, and it gets added in the interest on borrowings.

So the total will be $51 million, $52 million, somewhere in that range. Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division: And that's down from the $63 million you had earlier, is that correct? Or did that number also, that's for the Adam Radson [ph] derivative charges on that as well?

Yes, the big change is that there's only about $2.5 million that will hit our P&L for the next, I guess, through February of '15 related to the amortization of some crystallized, I guess, is the word they used in accounting terms, derivative contracts. We actually -- all of our derivatives are gone. But there was a balance that remained that has to be amortized now over the original term of the original bank debt, which as you recall, matured in February 15. So that's about $2 million, $2.5 million.

And then the last piece is the accretion of interest on our taxes, and that's around $3.5 million a quarter right now.

Okay. So you have to add that to that as well. So... Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division: Yes, $3.5 million a quarter?

Yes. So you've got $12 million -- you've got basically $12 million, if you will, a year, that's, that accretion number, the $49 million and then the $2.5 million. Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division: So we're looking like $16 million a quarter basically?

Give or take.

$2.5 million quarterly.

$2.5 million quarterly. I'm sorry, you're right. So it's $5 million a year. Ben, why don't we follow up with you if it's not a big deal? I want to make sure we get it right for you, obviously a lot of numbers flying around.

[Operator Instructions] Mr. Hall, there are no further questions at this time. I would like to turn the floor back over to you for closing comments.

Great. I don't have a lot just thank you very much for everyone's support, and we'll be talking to you hopefully at the end of a very successful Q2. So talk to you soon. And if anybody has any follow-up, we will be here for a while. Thanks, very much.

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