NCMI - NASDAQ

Good day, and welcome to the National CineMedia, Inc. Q3 2022 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Dan Dorenkamp, Director of Finance. Please, go ahead, sir.

Good afternoon. I'm joined today by our CEO, Tom Lesinski; and our CFO, Ronnie Ng. I would 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, including our discussion about the future impacts of COVID-19, 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. 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 or on the Investor Relations page of our website at ncm.com. Now, I'll turn the call over to Tom.

Thank you, Dan, and good afternoon everyone. Welcome to our third quarter earnings call. As the largest cinema advertising network in the U.S. with 75% of the opening weekend box office each week, we have a lot to be optimistic about. After five straight quarters of revenue growth and a strong upfront selling season, most of our pre-pandemic employers are now back on the screen. Our final upfront negotiations are ramping up and we're happy to report the return of longtime NCM clients across all key categories, and many deepening their investment with us. Today, we're able to prove that cinema is one of the highest value mediums for advertisers to reach a young diverse audience at scale in an unskipable, uninterrupted ad environment, with the most culturally relevant content in the world on a 40-foot screen. People simply crave the shared movie going experience. According to a recent study, going to the movies this summer ranked as a top must see experience, with more adults attending the opening weekend of new film releases compared to other popular summer activities, including baseball, beaches or even live music events. The box office has had a strong recovery in 2022 on a number of fronts. The third quarter brought in 1.9 billion at the box office up 40% from the third quarter of 21 and July was the first billion dollar box office month in three years. Six films reached or surpassed $300 million mark this year-to-date, the first time since 2019. Minions: The rise of Gru delivered the biggest Fourth of July opening weekend ever aided by the Gen

Thank you, Tom, and good afternoon, everyone. For the third quarter, our revenue was near to midpoint of our guidance range provided during the last earnings call. While our adjusted OIBDA was at the top-end of the guidance, resulting in a slightly higher margin than we have projected. The results for the quarter reflect our strong execution to achieve operational efficiency, while navigating through the recovery of the exhibition industry. In addition, our successful upfront advertising results that Tom mentioned of 85% of our historical average demonstrate the importance of our value proposition to advertisers. These upfront commitments, combined with a stronger film release schedule and higher movie attendance will set the stage for meaningful growth in the fourth quarter and 2023. As we mentioned on our last call, for the third quarter, we experienced a lighter film release schedule during the late summer and early fall than we anticipated. This was simply a matter of timing related to film production and post-production bottleneck during the COVID lock downs. With the holiday season on the horizon, we expect a number of films to again increase partly during the fourth quarter 2022 and into 2023. Total revenue for the third quarter was 54.5 million of roughly 72% compared to the same quarter last year. National revenue for the third quarter of 39.7 million was up over 75% compared to the prior year, while local and regional revenue for the third quarter of 9.8 million was up 72% compared to the same period last year. Looking at the operating metrics, we continue to deliver a large, high-quality captive young audience to our advertiser partners. This large scale and broad geographic coverage is critical to advertisers as we compete against large national and local and TV networks in various online social search and entertainment platforms for advertising budgets. Even with the less substantial film release schedule, third quarter network theater attendance remained over 100 million at nearly 107 million. This represents the third quarter in the last four, where attendance exceeded 100 million. In addition, overall attendance levels was roughly 65% of the pre-pandemic levels, which we experienced in the third quarter of 2018. The 65% was consistent with what we saw during the second quarter. Looking at our pricing, during the quarter, we continued to see improved year-over-year trends driven by favorable client mix, and higher platinum sales similar to what we saw earlier in the year. We continue to see the client mix evolve with large cap tech media and travel making up a large portion of our top 10 accounts for the quarter. As a result of this favorable mix of our third quarter National CPMs exceeded that of the third quarter of 2019 by 26%, making this the fourth consecutive quarter in which pricing exceeded 2019 levels. This CPM trend has been accelerating with the second quarter of 2022 of 19% versus the second quarter of 2019 in the first quarter of 2022 up 2% over 2019 levels. With a much higher percentage of our fourth quarter and 2023 revenue coming from our upfront commitment, we do not expect this accelerating CPM trend versus 2018 to continue as our revenue growth will begin to be driven more by an increase in inventory utilization, resulting in an overall increase in revenue per attendee. In fact, our third quarter revenue per attendee was up 22% versus the third quarter of 2021. Advertisers also continued to embrace and purchase our Platinum inventory spot. Despite the softer movie slate in August and September, we successfully sold platinum advertising in each month of the quarter. We continue to expect platinum spots to be in high demand for the fourth quarter with sales in each month of the quarter. As you can see, there are some very encouraging underlying market signals in our KPIs. Those favorable underlying trends continue to tell us that as movie attendance improves, we are well positioned for revenue growth in the future. Turning to our expenses, the third quarter operating expenses, excluding depreciation and amortization, non-cash charges, and one-time items were 47.5 million overall a 9% decrease compared to the second quarter, while representing 19% increase over the same quarter last year. These variances primarily reflect the seasonality of the business and variances in the theater access fees, and affiliate expenses related to increases in industry attendance. Our selling and marketing costs remained generally flat compared to the second quarter, while increased 27% over the same quarter last year. While we continue to make great efforts to contain costs, did increase certain costs over the prior year, where it was strategically necessary to support our growth and ongoing recovery in our business. Third quarter adjusted OIBDA was 7 million for a margin of approximately 13% compared to negative 8.2 million last year. As mentioned, this was at the high-end of our guidance range provided in August, which was a result of higher CPMs and focused expense management. Given our recent performance, we continue to be reinforced, in our view that as theater traffic builds back towards normal historical patterns and our inventory utilization increased due in part to our successful upfront campaign, including the sale of more of our high margin platinum unit, we are well positioned to continue to improve our adjusted OIBDA margins. Integration and other encumbered theater payments due from AMC for the third quarter were 1.2 million, compared to 0.2 million for the same period during 2021. As a reminder, integration payments are based on what NCM could have earned, had advertising been sold in those theaters by our sales teams. These integration and other encumbered theater payments are added to adjusted OIBDA for debt compliance in partnership cash distribution purposes, are not included in reported or adjusted OIBDA as they are recorded as a reduction to net intangible assets on the balance sheet. As our overall revenue increases, these payments will also increase. Third quarter GAAP loss per diluted share was $0.11, versus a loss per diluted share of $0.19 during the third quarter of 2021. Turning to our consolidated balance sheet, total debt net of cash NCM LLC at the end of the third quarter was 1.1 billion, approximately the same as at the end of 2021. Changes in debt related primarily to the $50 million revolver funded in January 2022, net of the approximately 25.8 million of NCM LLC is 5.875 senior secured notes, which NCM Inc., acquired for an average price in the mid 70s during the second quarter. Our average interest rate on all debt was approximately 6.5% for the quarter compared to 5.6% for the third quarter of 2021. This increase was primarily due to the higher rate of the new $50 million revolver that was funded in January 2022. Excluding NCM LLCs revolver balances approximately 53% of our total debt outstanding at quarter end had a fix interest rate. NCM LLCs has cash balance at the end of the third quarter was 60.9 million and including the 7.2 million of availability under the revolver, NCM LLCs total liquidity at quarter end was approximately 68.1 million which was in excess of our liquidity covenant that requires a minimum liquidity of 55 million. Last week, our Board of Directors voted to pause the NCM Inc., regular quarterly cash dividend as we continue to prioritize financial flexibility and liquidity. As always, the declaration payment timing and amount of any future dividends will be at the sole discretion of the Board of directors, who will also consider general economic and advertising market business conditions and the company's financial condition. With respect to the broader economy, and its impact on our business, we have not experienced significant climb marketing budget contraction, as consumer spending has remained strong despite the recent significant increases in market interest rates and the fear of a future recession. We have also not noticed any impact on our theater partners as business as the cinema business has historically done very well during periods of economic slowdowns. As cinema continues to be one of the lowest price forms of out-of-home entertainment, we expect that trend to continue. And while certain client categories may cut short-term, marketing expenditures and fear of a future recession, many important categories to us, such as auto have already been depressed over the last couple of years due to supply chain issues. As those issues abate, and more of their products become available, we have actually begun to see an increase in their marketing budgets. This is also true in certain consumer product categories such as telecom and insurance, as these companies compete for consumers during recessionary times. We will also benefit should the economy began to slow from our successful upfront campaigns that will help offset any contraction in the scatter market that usually accompanies an economic slowdown. Turning to guidance, we expect revenue for fourth quarter 2022 will be between 85 million and 95 million. We expect fourth quarter 2022 adjusted OIBDA to range between 32 million and 42 million, which compares to 18.4 million in the fourth quarter of 2021. In addition, we expect cash interest expense for the fourth quarter to be 80 million to 90 million and capital expenditures to be 1 million. While we remain optimistic about the recovery of our business over the medium to long-term, our large fourth quarter guidance range reflects some level of prudent conservatism with respect to the headwinds of a slowing economy and its impact on advertising spending. Having said that, it is important to note that due to our successful upfront campaign, 70% of our national revenue guidance for the fourth quarter of 2022 is already contracted versus 41% in the fourth quarter of 2021. As many of you are aware during the early part of September, Regal and its parent Cineworld commenced a Chapter 11 reorganization. The process is in the early stages and as Tom mentioned, there's not much we are able to add to you on beyond what you already know. From our perspective, nothing has changed on a day-to-day basis with Regal. We are advertising in all of their theaters without disruption and our business remains unaffected. While the process related to their agreement with us that have been in place for almost 20 years plays out. We continue to be the cinema advertising leader with 75% market share of the opening domestic box office each week, coupled with superior sales, marketing, research and operations teams, along with one of the largest movie goer databases, with the most robust campaign and analytics platform in the business. All of this allows us to deliver industry leading revenue per attendee to our theater circuit partners. As disclosed last week, we received a standard notice from the NASDAQ regarding our listing due to our current stock price. In addition to the recovery of our business, we have several other alternative measures, which we may pursue to maintain long-term compliance with NASDAQ standards, including a reverse stock split. We remain focused on building back our business to pre-pandemic levels and consider our NASDAQ listing to be an important component of that effort. As you can see, while we are being somewhat cautious about the current general economic conditions, our business is well positioned to benefit from our successful offering campaign, improving film release schedule, and higher theater attendance, which will help generate improved margins and start the process of deleveraging. Operator, please open the line for questions.

Thank you. [Operator Instructions] We will take our first question from Eric Wold with B. Riley. Please go ahead.

Couple of questions. I guess first off in the commentary around the 85% upfront commitments versus the 2017, 2019 period. Can you remind us where we are CPM wise versus those periods right now within the increase?

Yes. So I guess for clarification, are you talking about the fourth quarter or are you referring back to the prime third quarter?

No, sorry, the commentary that you -- upfronts that you're completing right now are by 85% of kind of revenue generated between the 2017 to 2019 period? Just trying to compare what the CPMs are embedded in that price you just completed or are completing versus backend.

Okay. Fair question, Eric. The CPMs in the current upfront are comparable to where they were, on an average basis from 2017 to 2019. There hasn't been an erosion in CPMs, which were quite happy about, as you know, we've never been a discounter in this category. So the pricing levels in the upfront are in fact, the good news is basically flat to where they were from 2017 to 2019.

Got it, okay. And then, once I connect the dots on something, the commentary around it's obviously, flat CPM is right there. And then in comments around revenue per attendee, if I look at the revenue per attendee, in the first two quarters, it was down about 9-ish percent, versus the same quarters in 19. But then the revenue for attendee in Q3 was down 24% versus Q3 '19. But the overall revenue for national and local, regional, the decline versus 19, the total revenues have been comparable through all three quarters. So what happened in Q3 that a blip or is there something else there that I'm missing that should be included?

No, I think the numbers you're signing is correct, where we saw I think in the first half of the year, we closed on 2019 and revenue per attendee basis versus in the third quarter. I think the quarter was really just a reflection of one obviously lower activity level in terms of the movie slate. And two, I think you really saw a weaker scatter market than we all anticipated. I think those two things combined together kind of led to what we saw in the third quarter. But I think the most important thing to remember is that the week slate is important in terms of generating volume and activity with advertisers.

Also, as it relates to the CPM coming from before that's a forward-look, Eric, for really Q4 to steer. And it's not an explanation of the softer scatter market that we saw in the Q3 correlated as well to lower box office estimates that we had in September.

Got it. Okay, just final question for me, then if CPM is forward or flattish versus 19 and we get back to a healthier film slates and activity next year, if any thoughts on obviously scatters is still a question mark, any thoughts on where you think revenues per attendee can start trending in 2023?

We are not going to comment on 23 yet. Hopefully over the next quarter, we'll be in positions to start talking about that. I like to get this year wrapped up, and then hopefully we can provide more specificity on '23 on the next call.

Fair enough. Thank you both.

We will take our next question from Jim Goss with Barrington Research. Please go ahead.

Okay, thanks. So a couple of them. First, I was wondering about the -- your approach and attitude toward the platinum stuff. In terms of the context or the share of growth, as you might achieve in the National advertising segment, like, will this be a bigger portion? And will it really be the only place really growing within National for the time being in terms of total dollars?

I think actually, Platinum is a growth story. But I think the post show that incremental five minutes on top of platinum, that we negotiated right before COVID hit is also a growth part of our business. We've got seven advertisers committed platinum this year, which is a lot more obviously, than we had last year. So platinum is a growth story, but so is the post show. And without the combination of those two things, we wouldn't be able to commit to growth story. So that's why we tried to future proof the company in the fourth quarter of 2019. And now we're finally at a point where we can sell the upfront again, against post show and platinum. So I think the upfronts are real testament to the strength of and the growth opportunity associated with platinum and post show.

Okay. With the return of greater share of local and that you mentioned, would it be complimentary, or would it be sort of just taking some of the share that might have been with National?

I don’t think its correlation, I would say it's incremental, it's not really substituting, it's different advertisers. And it's a lot -- it's been in scattered lately. So I don't look at local as being contributing a cannibalistic piece to our business at all. Its different advertisers in different municipalities. So we're hoping that logo can continue its momentum, and get back to where it was, which was a really significant part of our business in 2019. Many of the key categories and local are recovering, including local automotive. So I think local has been the last sort of segment to come back in our portfolio, largely related to smaller companies still grasping with budgets coming out of COVID. But the recent indications are the locals coming back and we're really optimistic that trend will continue over the next several quarters.

Okay. And the last one for now. Obviously, the preference of premium box office has been growing more rapidly or returning more rapidly than the number of attendees. And I'm wondering if whatever CPM increases, you're getting -- attempting and helping to offset, maybe that erosion that you'd experienced, and if there's an opportunity because of the demographics, and because of the appeal of your ad spots, to maybe stay ahead of that erosion?

Well, I think it's critical that we focus on our most premium inventory, in light of what you just said. Obviously, nothing can substitute for attendance. And as you know, the attendance is still significantly down from 2019. So it's going to take both the combination of selling more premium inventory, combined with what we believe will be a very healthy '23 and '24. But we need both and thankfully we have some of the most premium high CPM inventory available of any kind. But we do need the attendance to continue to recover. No one knows what the actual attendance is going to be in '23 and '24. But the release schedule, which our clients bought into in the upfront, would suggest that there's a lot of optimism for premium inventory. And the fact that we sold seven times more platinum spots this year than last is a good indication of that. But obviously we have a long ways to go but we're really happy with the momentum that we've achieved just in the last six months or so.

Okay. Thanks, Tom.

That will conclude today's question-and-answer session. Mr. Lesinski. I will turn the conference back to you for any additional or closing remarks.

Okay, well, thank you everyone for your questions and thank you for your support. With a robust slate of scheduled content in Q4 and our advertisers back on screen with us, we look forward to a really strong finish to '22. We know that the content is there, the audiences will show up especially that hard to reach young audience are not available in the TV marketplace anymore. So we can now easily prove out to our advertisers that cinema outperforms linear TV, delivering better engagement than social and the ad supported streaming apps. And as we look ahead, we anticipate even more people will be coming into the theater to enjoy their favorite new movie on the big screen. I want to thank our entire team at NCM for their hard work and thank our shareholders, our lenders and our advisors for their support and patience. We truly appreciate you joining us on our call and look forward to seeing all of you at the movies. Thank you.