Katherine Lee Scherping - National CineMedia, Inc. Andrew J. England - National CineMedia, Inc..

Eric Wold - B. Riley & Co. LLC Julia Yue - JPMorgan Securities LLC Eric O. Handler - MKM Partners LLC Mike Hickey - The Benchmark Co. LLC.

Greetings and welcome to the National CineMedia Incorporated second quarter 2017 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Katie Scherping, Chief Financial Officer..

Thank you, Omar. Good afternoon, everyone, and thanks for joining our call. I'd like to remind our listeners that this conference call contains forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933 as amended and Section 21E of the Securities 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 risks to differ materially from the company's expectations are disclosed in the risk factors contained in the company's filings with the SEC. All forward-looking statements are expressly qualified in their entirety by such factors. Further, our discussion today includes some non-GAAP measures.

In accordance with Regulation G, we have reconciled these amounts back to the closest GAAP basis measurement. These reconciliations can be found at the end of today's earnings release, which may be found on the Investor page of our website at www.ncm.com. Now with that, I'll turn the call over to Andy England, CEO of National CineMedia..

Thanks, Katie. Good afternoon, everyone. Welcome and thank you for joining us for our second quarter 2017 earnings call. During this call, I will spend a few minutes highlighting the company's second quarter 2017 results, and Katie will then provide a more detailed discussion of our financial performance for Q2 and reaffirm our guidance for 2017.

And then, as always, we will open the line for questions. As we had noted on our last earnings call in May, second quarter was looking challenging and remained challenging throughout the quarter.

The softness we had experienced in the first quarter continued into Q2 due to a slow scatter market as well as timing from some of our upfront and content partner commitments.

The difficult quarter was further exacerbated by a few one-time charges, including a couple of balance sheet write-offs and accounting for our new Denver office lease, which although was cash-neutral is reflected as a one-time charge to the P&L. Katie will explain in further detail in a moment.

I'll move on to briefly review the top-line numbers and share some highlights regarding the progress we made in several strategic focus areas of our business. Total revenue for the second quarter decreased 15.9% to $97.1 million from $115.4 million for the comparable quarter last year.

Adjusted OIBDA decreased 28.8% to $42.3 million for the second quarter of 2017 from $59.4 million for the second quarter of 2016. Our national sales team had a tough quarter with national ad revenue down 20.5% to $66 million versus $83 million in Q2 of 2016.

This decrease in national advertising revenue, excluding beverage revenue from the founding members, was due primarily to a 16% decrease in impressions sold because of lower demand in the scatter market and lower content partner spending in the second quarter of 2017 compared to the second quarter of 2016 that I noted previously.

Our local and regional sales revenue was down 7.1% to $23.5 million from $25.3 million in second quarter of last year.

This is primarily due to a decrease in revenue from contracts greater than $100,000, whereby they had 27.3% fewer contracts, partially offset by 1.8% increase in average contract value for the second quarter of 2017 compared to the second quarter of 2016.

However, we are continuing to benefit from our strategy of competing for National Spot TV budgets by the inclusion of NCM into the Mediaocean and STRATA planning and buying systems, enabling us to tap into the huge pool of National Spot TV dollars and making it even easier to plan and buy our inventory.

Our digital sales team had a strong Q2, up 16% in Q2 and up 22% year-to-date, which whilst still a very small part of overall revenue continues to reinforce our belief that digital needs to be an increasingly important part of our business strategy for the future.

Total revenue for the six months ended June 29, 2017 decreased 11.8% to $169 million from $191.6 million for the comparable period last year. Adjusted OIBDA decreased 28.2% to $59.9 million for the first six months of 2017 from $83.4 million for the first six months of 2016.

National advertising revenue decreased 17.1% to $110.4 million in the first half of 2017, down from $133.2 million in the first half of 2016. Local and regional advertising revenue for the first half of the year was also down 3.4% to $42.6 million for the first half of 2017 versus $44.1 million in the prior year.

Looking ahead, the second half of 2017 is shaping up nicely, and the third quarter so far is pacing ahead of last year. The Q3 scatter market appears to be rebounding and the Q4 advertising marketplace is showing promise as well.

In addition, many of our upfront commitments are hitting in the second half of year, which gives us a solid sales foundation to build upon to finish out the year strong and is reflected in our reaffirming guidance for 2017.

When I last spoke to you, we were just about to present NCM's sixth annual upfront luncheon event at New York City's AMC Loews Lincoln Square Theater. On May 17, we unveiled exciting plans for our new Noovie pre-show and digital strategy to the media buying community to overwhelmingly positive reviews.

As you know, we've had tremendous success with our FirstLook pre-show. But if you look around at HBO's FirstLook, MSNBC's FirstLook, and FirstLook on NBC, you'll notice that it was not an ownable brand that is unique to NCM, and intellectual property is key.

When we first began to explore the idea of reinventing the pre-show, we asked our proprietary NCM behind-the-screens panel of 5,000 moviegoers what they wanted to see, and the results were enlightening. They want more ways to connect, to connect with their friends and family with what's new in entertainment and with their local community.

They want interaction and engagement, either directly with the big screen or digitally before and after the movie theater experience. Noovie is a new premium video platform developed by NCM to connect brands with movie audiences. At its core, Noovie is NCM's new pre-show that audiences will experience before the movie, launching on September 29.

But Noovie stretches beyond the theater. It will also be an integrated additional ecosystem delivering entertaining content, purposeful commerce, and interactive gaming opportunities. When we say what's Noovie, it is both a question and a statement about what's new at the movies. For some, what's Noovie may be a shared experience.

For others, it may be the value of being in the know and ahead of the crowd. Most importantly, for NCM and our brand partners, Noovie gives movie audiences a reason to arrive early to discover what's next.

And with the recent innovations like recliner seats and dine-in theaters increasing attendance, this is the perfect time for us to create an even more compelling experience for audiences to enjoy while they're relaxing and waiting for the movie to start.

Content is going to be a key part of Noovie, and we're programming a special early segment that will give audiences a look what's Noovie in their world.

We'll be partnering with some of the biggest content producers, entertainment stars, and even local communities to share the best new music, exclusive interviews, and stories about local hometown heroes.

Our approach is to use the big screen as the trailer for the digital experience, driving audiences from our Noovie pre-show to NCM's new digital properties, like the new Noovie app launching in late 2017 or early 2018, and Noovie social media channels, and then back to the multiplex to catch the next big movie and new Noovie content.

Noovie is an ongoing conversation. It's something that's going to continue to grow as movie audiences evolve. We're building it all to be a great consumer experience, which will of course make it a great opportunity for brands as well.

Moving on to the interactive gaming front, we recently finalized our acquisition of Fantasy Movie League, the box-office predictions game co-created by ESPN's Senior Fantasy Analyst, Matthew Berry, that combines the fierce competition of fantasy sports with the world of entertainment and movies.

It represents NCM's first step in our new digital strategy, and not only gives us the perfect initial game to incorporate into Noovie, but also gives us the talent of its developers, co-founders Eric LaVanchy and Larry Tobin, who have both joined NCM's growing Digital Products team in the newly created roles of General Manager-Gaming.

They will oversee the upgrade and expansion of Fantasy Movie League as well as the development of new games for NCM, such as Name That Movie.

They are both leaders in digital and mobile gaming with a long track record of success, including creating interactive games for sports, media, and consumer brands, like MTV, Yahoo!, FOX Sports Interactive, and the NFL Players Association, to name a few.

Matthew Berry will also continue to remain actively involved in Fantasy Movie League as a consultant and evangelist.

As discussed on our last call, 2017 is a transitional year for NCM as we evolved from being not only the largest cinema ad network, but also a progressive integrated digital media company that reaches movie audiences wherever they may be.

As you know, 2017 also begins the transition in NCM ownership with the court-ordered sale of 30 million NCM shares from AMC over the next two years.

While I have no updated news to give you on that front, we remain committed to our partnership with AMC and we're continuing to work closely with them operationally as well as on the divesture of their shares.

The NCM board, senior management team and I are extremely optimistic about our future and are excited to work together to achieve our vision to be the connector between brands and movie audiences. We know we have a lot of work ahead of us.

We will continue to focus on our primary strategic initiatives, which are expanding our core on-screen business, breaking new digital ground, competing for the pool of National Spot TV dollars, making it easier to plan and buy our inventory, growing our affiliate partnerships, investing in the upgrade of our CRM and other internal systems, and moving to a smaller, more modern headquarters location here in Denver next spring, which will enable a more collaborative environment and allow us to attract and retain top talent.

We expect our strategic initiatives to begin bearing fruit later this year and into next, driving growth in 2018 and beyond. Now, I will turn the call over to Katie to give you more details about our Q2 2017 operating performance and additional color surrounding the reaffirmation of our 2017 guidance estimates.

Katie?.

Thanks, Andy. I'll walk through the results that Andy highlighted in further detail, discuss our thoughts on the quarter, and our outlook for the rest of the year, then we'll open the call to your questions.

For the second quarter, our total revenue decreased 15.9% versus Q2 2016, driven by a 20.5% or $17 million decrease in national advertising revenue and a 7.1% or $1.8 million decrease in local and regional advertising revenue, partially offset by a 7% or $500,000 increase in beverage revenue.

Total Q2 adjusted OIBDA decreased 28.8% or $17.1 million and adjusted OIBDA margin decreased to 43.6% from 51.5% in Q2 2016. For the first six months of 2017, total revenue decreased 11.8% or $22.6 million, adjusted OIBDA decreased $23.5 million or 28.2%, and adjusted OIBDA margin decreased to 35.4% from 43.5% in the first six months of 2016.

The Q2 and year-to-date declines are primarily driven by decreases in higher-margin national advertising revenue as a result of a soft scatter market, as mentioned on last quarter's call, and the timing of content partner and upfront allocation.

Further, our Q2 performance was impacted by non-cash impairment charges of $1.7 million in Q2 related to investments obtained in prior years for advertising services. Year-to-date non-cash impairment charge totaled $3.1 million. Recall, we recorded $1.4 million for the impairment of similar investments in Q1 and a $700,000 impairment in Q2 of 2016.

As Andy mentioned earlier, we signed a lease of new office space for our headquarters here in Denver. Our current lease expires in 2021, but we had the option for early termination on June 30, 2018 if we provided notice by June 30, 2017 and paid $1.8 million penalty as an early termination fee.

The lease we signed with the new landlord required them to reimburse us for the full $1.8 million termination penalty, so there is no cash impact. But we are required by GAAP to record the penalty as an expense because we received reimbursement of this penalty as an incentive to sign the new lease.

This reimbursement will be amortized as the reduction of our lease expense over the new lease term for approximately 10 years or about $180,000 a year, beginning with the start of our new lease in 2018. Our Q2 2017 adjusted OIBDA excludes this charge.

In the second quarter, we recorded $4.3 million of integration payment from Cinemark and AMC associated with Rave Theatres and Carmike Theatres versus $700,000 in Q2 2016.

You should note that these integration payments are added to adjusted OIBDA for debt compliance and partnership cash distribution purposes, but are not included in reported revenue or adjusted OIBDA, as they are recorded as a reduction to net intangible assets on the balance sheet.

We expect to record approximately $18 million to $20 million of these integration payments from our founding members during 2017. Our Q2 2017 advertising revenue mix shifted away from national toward local, regional and beverage, and with 68% national, 24% local and 8% beverage versus Q2 2016 that was 72%, 22%, and 6%, respectively.

Q2 national ad revenue decreased 20.5% versus Q2 2016 and was driven by a 16% decrease in impressions sold and 11.4% decrease in CPM, partially offset by other revenue.

The decrease in impressions sold was driven by a decreased inventory utilization to 112.1% from 124% in Q2 2016 on a 7.1% decrease in network attendance that was impacted by a difficult comp versus a strong Q2 box office in 2016.

For the first six months of 2017, national ad revenue decreased 17.1% driven by a decrease in utilization to 93% from 102.6% on network attendance that decreased 0.9% and a 12.8% decrease in CPMs due to the timing and mix of content partner, upfront and scatter spend versus the first six months of 2016.

Finally, our quarter-end make-good balance was $4.2 million at the end of Q2 2017 versus $4.3 million at the end of Q2 2016.

Q2 local and regional ad revenue decreased 7.1% or $1.8 million versus the second quarter in 2016 and was driven by a decrease in revenue from contracts greater than $100,000 as there were 27.3% fewer contracts, partially offset by a 1.8% increase in average contract value.

The decrease in local and regional advertising were partially offset by an increase in online and mobile revenue during the second quarter of 2017 compared to the second quarter of 2016. For the first six months of 2017, local and regional ad revenue decreased 3.4% or $1.5 million versus the first half of 2016.

The decrease in advertising revenue was driven by a decrease in contracts greater than $100,000, whereby they had a 10.6% decrease in average contract value and a 2% decrease in contract volume.

The decreases in local and regional advertising revenue were partially offset by an increase in digital revenue during the first half of 2017 versus the prior-year comparable period. Overall digital sales continue to represent a very small portion of our total revenue, but as Andy mentioned, Q2 sales are up 16% and year to date are up 22%.

Q2 beverage increased 7% or $500,000 versus Q2 2016, driven primarily by a 10.2% increase in beverage CPM. This was partially offset by a 9.2% decrease in founding member attendance in the second quarter of 2017 compared to the second quarter of 2016.

For the first six months of 2017, beverage revenue increased 11.9% or $1.7 million versus the first six months of 2016, and was primarily driven by a 10.2% increase in beverage CPM. These increases were partially offset by a 2.8% decrease in founding member attendance in the first six months of 2017 versus the comparable period a year ago.

Looking briefly at diluted earnings per share, for the second quarter we reported GAAP diluted EPS of $0.02 versus EPS of $0.11 in Q2 2016.

Adjusted for CEO transition costs in 2017 and 2016 and the early lease termination expense in 2017, the net income for the second quarter of 2017 is $0.03 per share and $0.11 per share in the second quarter of 2016.

For the first six months of 2017, we reported GAAP diluted EPS loss of $0.06 versus income per share of $0.04 for the first six months of 2016.

Excluding CEO transition-related costs recorded in 2017 and 2016 and the early lease termination expense in 2017, diluted loss per share for the first six months of 2017 would have been $0.05 versus income per share of $0.07 for the first six months of 2016.

For the first six months of 2017, capital expenditures were $6 million versus $7 million for the first six months of 2016. We are still estimating that our full-year 2017 capital expenditure will be in the $13 million to $14 million range or approximately 3% of revenue.

Now moving on to our balance sheet, our total debt outstanding at NCM LLC at the end of Q2 2017 was $930 million versus $942 million at the end of Q2 2016. Our revolver balance at the end of the second quarter in 2017 was $10 million compared to $72 million at the end of Q2 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 4.2%. Excluding revolver balances, 70% of our total debt outstanding at the end of Q2 2017 had fixed interest rates.

Our consolidated cash and investment balances as of Q2 2017 decreased by approximately $13 million because of normal seasonality in the business to $52 million from the end of Q2 2016 with $47 million of this balance at NCM, Inc.

As we announced last Wednesday, the Board of Directors have authorized the company's regular quarterly cash dividend of $0.20 per common share of stock. The dividend will be paid on August 31, 2017 to stockholders of record on August 12, 2017.

We intend to pay a regular quarterly dividend for the foreseeable future at the discretion of the Board of Directors, consistent with our intention to distribute over time a substantial portion of our free cash flow.

The declaration, payment, timing, and amount of any future dividend payable will be at the sole discretion of the Board of Directors, who will consider general economic and advertising market business condition, current and anticipated cash needs, available cash and the company's financial condition, and any other factors that the Board of Directors considers relevant.

Our annual dividend yield is currently 13.1% based on today's closing share price of $6.70. Our net senior secured leverage in NCM LLC as of the end of Q2 2017 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 that while we have no NCM LLC total leverage covenant, our total leverage at NCM LLC net of NCM LLC cash balances was approximately 4.5 times at the end of Q2 2017 versus 4.4 times at the end of Q2 2016.

Now turning to our guidance for the full year of 2017, as Andy noted earlier, we are expecting the second half of 2017 to be much better than the first half. The third quarter's pipeline is currently pacing ahead of last year, and while still early, Q4 is showing promising signs as well.

Taking all of this into account, we still expect total revenue to be in the range of $422 million to $442 million or down approximately 4% at the midpoint versus 2016. Adjusted OIBDA is expected to be in the range of $202 million or $217 million or a decrease of approximately 9% at the midpoint versus 2016.

Based on many conversations with investors in the past couple of months, we thought it would be helpful to walk through some assumptions that will provide with the framework for thinking about the available cash payment from NCM LLC to NCMI in 2017.

Now starting with your assumption of adjusted OIBDA, you want to consider the following estimates that should be added to that number. $3.1 million of non-cash impairment charges year-to-date, approximately $18 million to $20 million in integration payment, $6.5 million from the Fathom note receivable.

And then you want to consider subtracting the following. Cash interest expense of approximately $50 million and capital expenditure of $13 million to $14 million. This will provide an estimate of available cash for 2017.

The available cash will then be distributed by NCM LLC pro rata based on ownership of NCMI and the founding members at the end of each quarter. At NCMI, there was about $5 million to $6 million of cash received from management fees paid from NCM LLC and cash interest earned on NCMI's cash balance.

NCMI pays about 25% of its cash and taxes to the founding members through the tax receivable agreement. So, hopefully this helps clarify all the puts and takes to the available cash calculation that are made and distributed on a quarterly basis between NCM LLC and NCMI, and the founding members.

So, to wrap it up, with the first half of 2017 behind us, we are encouraged by the robust pipeline taking shape for the second half of the year.

We felt confident that our continued investments in expanding our core on-screen business, creating a complementary digital ecosystem, our new partnerships with Mediaocean and STRATA, and our focus on growing our affiliate business as well as moving to a new headquarters will position us for growth into 2018 and beyond.

So, that concludes our prepared remarks. And, Omar, we'll open up the line for questions..

At this time, we will be conducting a question-and-answer session. Our first question is from Eric Wold of B. Riley. Please proceed with your question..

Thank you. Good afternoon, guys. Couple of questions, I guess, one, just a clarification, and then a few around the launch of Noovie.

I guess, one, when you talk about your Q3 pacing ahead of last year, are you seeing that for both national as well as regional, local? And if so, to the same kind of general degree?.

I have to check that..

Eric, I'd say yes. Both of them are exceeding expectations from last – or not expectations, exceeding 2016's pacing..

Okay. And then on Noovie, I know it's not launching until kind of end the Q3, early Q4, but I'm assuming you've been talking to advertisers, possibly even selling some of that digital inventory on both, the Noovie app that will launch as well as on the Fantasy Movie League.

If so, are you seeing any demand for digital, those two digital offerings as incremental to kind of the in-theater spending that someone had committed to, or is there an opportunity for somebody to kind of move commitments from one to the other, so net-net it doesn't add? And then if you're – and as you talk to advertisers, would you allow someone to advertise solely on just those digital properties, or does that kind have to be a packaged deal that if you want to be on that, you've got to be in theater as well?.

Firstly, thanks for both questions, Eric. I think just to be very clear on that timing, a new Noovie pre-show will launch on the 29 of September. The Noovie digital web presence and app will launch either at the end of this year or beginning of next.

So, the digital piece will lag the pre-show piece, which I have no concerns of it, because right now – so it starts as kind of rebranding of FirstLook with some of new content segments as well with the new sort of pre-show lineup.

And then obviously, once we have the app up and running, that's when we'll start using inventory to drive people to the digital presence. And candidly, we typically have more inventory available to do that in the first quarter, anyway, whereas Q4 tends to be pretty busy. So, that's kind of the way that works.

From a Fantasy Movie League point of view, well, let's sort of blend the general with the specific. On the specific side, if you look at FML, FML on its web presence does accept advertising today, but not on its app. So right now, there's no advertising available on its app.

So, we have some product development to do to make sure we have ad units available on FML. But we will have the same types of ad units available on FML that we do on the Noovie digital app and web presence when it launches.

So, from a revenue point of view, we're thinking much more going into 2018 rather than getting any meaningful additional revenue in 2017.

Now, with all that said, we've had a number of conversations with advertisers about whether it's everything from FML to Noovie digital, to the Noovie pre-show, and there's general excitement that this is nothing like things that we've done before and we're hearing a lot of good excitement from large national advertisers.

So, we're certainly encouraged by that. I think when it comes to whether or not we would sell ad inventory, digital ad inventory separately, absolutely, we would. However, it's worth nothing that the vast majority of cinema accelerated contracts we sell tend to be sold alongside a pre-show buy. And that's not because we mandate it.

It's just because that's the way that our advertisers tend to like to buy it. So, we would anticipate that most of the ad sales for the medium term on the digital side will get bundled with pre-show, but certainly not mandated..

Perfect. Thank you. I appreciate it..

You're welcome. Thank you, Eric..

Our next question is from Alexia Quadrani of JPMorgan. Please proceed with your question..

Hi. Thank you. Julia Yue on for Alexia. Hoping to get a little more clarity on the ad market, specifically in Q3, how much visibility or confidence you have into the ad growth guidance that you gave at this point? I guess, is there any risk the advertisers could shift out their ad spent? And then you mentioned the scatter market is rebounding.

What do you think is causing that? Are you seeing that coming from any specific categories or industries?.

So, we have – thank you, Julia. We have a lot of money that's going to happen in the back half of the year that was booked through upfront and content partner commitments, so that's a big part of it, right? We have – time in the year is running out and that advertising has to get booked, so that's certainly part of it.

I think we're also seeing some excitement on, in particular, the fourth quarter film slate. But I think in general, it certainly won't be our intention and we have no indication that advertisers are going to be looking to move advertising out of Q3.

I'm sure it's not lost on you that the estimates from exhibitors are that attendance is going to be weak in the Q3. So, obviously, we're doing the very best we can to make sure that we book all the slots in Q3. So, we don't have to push a large make-good into Q4, but that is certainly work in progress.

In terms of why scatter is stronger, whether it is – I've heard different theories. One is that advertisers are, one way or another, getting comfort that – I think when the new administration came in, there was a bit of wait-and-see attitude.

And now, people have waited and see for six months, and whether they like it or not, they need to get on with business, and I think that's partly an influence.

I think also the ratings declines that you're seeing in many of the broadcast and cable TV guys mean that a lot of their inventory is getting sucked up with make-goods, which in turn means that they don't have inventory available for scatter, whereas obviously we do, so I think that's an influence as well.

Anything you'd add to that, Katie?.

No. I think that's okay, good..

Got it. And then I was wondering if you could also talk a little bit about how you think the advertisers are thinking about cinema this year now that you're through the upfront process.

In particular, I know in the past you've talked about theaters converting to recliners with reserved seating, and it wasn't really affecting your business much based on the Nielsen data. I was wondering.

Are you seeing that become a greater part of the conversation with advertisers this year?.

It is certainly part of the conversation. I think in general, it's a larger part of the analyst conversation, in all honesty..

Okay..

But it's certainly a part of the conversation. People want to know what the audience build looks like and they want to understand the cinema. At the same time, with the exception of the May through September time period is obviously tough this year from an attendance point of view.

But if you look, in general attendance I think has been very stable in cinema, and so we very much have that going for us. Certainly, all of the evidence that we gather from exhibitors, which I know you look at as well, would suggest that recliner seats help drive attendance.

And notwithstanding the fact that we rely on the film slate as to the exhibitors, having those recliners drive up interest, excitement, and the experience in the theater we think is a good thing. So overall, we're bullish on the sector and we believe that as we hit Q4, attendance we're told will come roaring back..

Great, thank you very much..

Thanks..

Our next question is from Eric Handler of MKM Partners. Please proceed with your question..

Thanks for taking my question. I'm just curious about 3Q and the strength that you're seeing. Last year was a bit of an abnormal 3Q because of the impact of the Olympics.

So if you look at normalized levels or maybe let's go back two years, how is pacing for 3Q looking relative to historical levels?.

Eric, we're still pacing better at this point in time of the year than we have been in the last couple of years. So we're pretty confident that Q3 is going to shake out. We look back three or four years when we do our quarter, or our monthly – our weekly, sorry, projections, and we're actually better than we have been in the last couple years so far..

Okay, great. And then as a follow-up, I'm just curious.

Are you seeing any trends with any new categories or who's coming back or what's soft right now? Where are you seeing the bulk of your dollars coming from?.

Again, it's a good question. So I was reading in MediaVillage only last week that the two most challenged categories of the year to date have been entertainment and auto, both of which are down in the overall spending in the low double digits. Those happen to be our two largest categories.

So obviously, it doesn't help us when entertainment and auto are not spending. And at the other end of the spectrum, the most aggressive spending is coming from pharma, and we frankly just don't really participate in pharma. So the category-by category hasn't really helped us. Now with that said, we are certainly making progress in some categories.

In other categories, we're not doing as well as we'd like. But I can assure you we're strong believers, and I give you this is an example, that we should be doing better with QSR. QSR is a huge category. They're interested in selling to millennials.

We have a huge number of millennials who come in and out of our theaters, and it's our belief that we should be doing better with QSR, and we are showing some progress there. I'd also like to see us do better with telcos and with insurance, and the sales team is very much focused up against those categories.

So sometimes, category strength works for you, sometimes it works against you. But one thing's for sure, whether the winds are for or against you, it's time to work hard, and that's what the team is doing..

Great, thank you very much..

Absolutely..

Our next question is from Mike Hickey of the Benchmark Company. Please proceed with your question..

Hey, Andy and Katie. Thanks for taking my questions. I appreciate it..

Hey, Mike..

I guess I'm curious on the strength that you see in local sales in Q3. It seems like that's a category that is a little bit more impacted by perception of how strong or lack of strength that we see in the box office. And so I think it's pretty clear the box office is exceedingly weak. We certainly saw that over this last weekend and quarter to date.

So I'm curious why strength in local when the box office is sort of plunging here?.

That's a fair question, Mike. And one that's a little tough to put our finger on, because our local sales are doing just fine in Q3. Obviously, they're a bit soft in the first half of the year, but doing fine in Q3. So, maybe there's some macroeconomic indicators there.

But one thing is for sure, I think, big titles tend to really help, to your point, and Star Wars we're very optimistic about for our regional team in particular.

So I can't shed a lot more light on it than that other than the fact that I think we have a strong regional team led by a strong leader, and those guys have their nose to the grindstone making good things happen. And of course, they're also very commissioned based.

And so, that is a key driver of their effort, but it's a motivated and very experienced team and we're proud of the efforts they're putting in..

And we're also seeing our regional and local teams doing a great job in packaging and bundling with digital online mobile offerings as well. So, they're doing really well on being aggressive in that front too..

Okay, thank you. I guess the next question is on national for Q3. If we look back last year, you're utilized at close to 133% and I think it's sort capped at 136%, and your CPM was up, I think, a couple percent.

So, curious when we think about the likelihood of impression being a lot lower this year – or this quarter, excuse me, given the weakness that we're seeing in attendance trends with what look to be a pretty tough comp, I guess, when you look at utilization and CPM prior year Q3.

How we think about, I guess, the drivers of growth in national in Q3? Thank you..

Mike, our cap kind of the way we look at the cap of utilization is about 145%, because we have flexibility to extend the show as we need to. So that – yes, it may be a tougher comp this year depending on where the slate comes out.

But I think when we look at content partners and scatter coming back, those are higher-dollar CPMs than what we had earlier in this year when we saw scatter pretty weak, that's usually a higher dollar CPM placement than an upfront would be, for example.

So, as we see the content partner and scatter market placing ads in the back half, we should see that CPM increase as well..

Okay. Good. Thank you. Last question, can you give us any visibility on what you're modeling for? What you're expecting for a maybe per-screen attendance trends in Q3 and then Q4? Thank you..

I think what we're hearing from the exhibitors, I think they're talking about down 15% in Q3. And again, as Andy spoke to earlier, we're going to watch that utilization and make sure that we don't end up with a large make-good.

So, we're managing the inventory within the quarter to make sure that we're giving the impressions that have been sold throughout the quarter..

All right. Thanks, guys. Good luck..

Thank you, Mike..

Ladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call back to Andy England for closing remarks..

Thank you, Omar. Well, just to wrap up, obviously, a very challenging second quarter, a challenging first half of the year for National CineMedia, but we feel very good about where we are going forward.

We feel much better about the second half of the year as we – than we did about the first, driven by content partners, driven by a strengthening scatter market. So despite some of the challenges for exhibitioner having in Q3, we feel good about our ability to deliver against that guidance.

That's partly driven, of course, by the work we're doing against our strategy. We're convinced we're doing the right things in terms of fighting to bring on other affiliates, making sure that we have the best digital offerings available, and et cetera.

So, improved things to come in our view and we appreciate you taking the time to spend time on this call with us. Thank you very much..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..