NCMI - NASDAQ

Good day, and welcome to the National CineMedia, Inc. Q3 2023 Earnings Conference Call. Today all participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] At this time, I would like to turn this conference over to Dan Dorenkamp, Director of Finance. Please, go ahead, sir.

Thank you. Good afternoon. I'm joined today by our Chief Executive Officer, Tom Lesinski; and our Chief Financial Officer, Ronnie Ng. I would like to remind our listeners that this conference call contains forward-looking statements within the meaning of 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 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.

Welcome to our third quarter 2023 earnings call. It's been about a year since we've done a public earnings call, and I'd like to take a brief moment to give an overview of NCM for those of you who are new to our story as there has been a lot of positive changes over the past year. So let's get started. National CineMedia is the long-term category leader in cinema advertising. And with over 18,000 screens in more than 1,400 theaters, the company annually reaches over half of the highly desirable 18 to 34 year old demographic and 73% of the opening weekend box office of the biggest U.S. movie releases. NCM maintains exclusive agreements with the three largest national cinema chains in the United States: AMC, Cinemark, and Regal, along with approximately 40 other agreements with affiliate theater chains. We recently completed a successful renegotiation with Regal for a new 10-year agreement, which will continue to create growth and value for the company. Through our industry-leading scale, NCM continues to be a leader in the overall premium video advertising marketplace. With the development of NCMX, our leading data-driven audience platform, along with a number of first-to-market data and attribution initiatives, NCM has transformed cinema into a medium that delivers both brand building and performance metrics, including advanced targeting and attribution capabilities. As many of you already know, since we last spoke, NCM has gone through a significant balance sheet transformation, which has positioned the company for future cash flow growth and success. We are and will remain focused on deploying that cash to provide the greatest return to shareholders. We successfully concluded our financial restructuring on August 7th of this past year, which was quickly and diligently completed in under four months. We eliminated almost $1.2 billion of debt and approximately $90 million of annual fixed charges, substantially strengthening our balance sheet and improving our financial flexibility. We also entered into a $55 million exit financing facility, which is being used to fund operations and growth initiatives, further empowering NCM's momentum as we propel forward and continue to drive shareholder value. With a strengthened balance sheet and as one of the very few NASDAQ-listed media companies with no net debt, NCM is now very well positioned to optimize and leverage its unmatched scale and offerings, connecting the biggest brands with the sought-after moving-going audiences while at the same time creating significant shareholder value in the process. This quarter, we also announced a number of new board members who bring extensive digital, technology, advertising, media, and financial experiences to our company. NCM's strong executive team continues to lead the business and has partnered closely and seamlessly with the new board to drive growth initiatives and aggressively build the company back as cinema audiences return to theaters. Now we will turn to our focus to third quarter results. The cinema industry saw positive signs of recovery this quarter as network theater attendance exceeded 130 million, a 24% increase from the 106 million attendees in the prior year, and roughly 80% of pre-pandemic levels. This recovery was largely propelled by the compelling movie slate led by Barbenheimer, the simultaneous film release in July of the cultural and box office hits Barbie and Oppenheimer. The third quarter of 2023 has continued to demonstrate that Americans, specifically those age 18 to 49, love going to the movies. The key demographic accounts for 70% of our audience, and we have reached 53 million of them to date. The Gen

Thank you, Tom. And good afternoon, everyone. Before I dive into the results, I want to note that today I will be discussing NCM LLC's operating results, which would have been similar to NCM Inc.'s results if the businesses were consolidated for the entirety of the third quarter of 2023. To be clear, during the Chapter 11 process, NCM Inc. was not consolidated with NCM LLC, but will be going forward. For the third quarter NCM’s revenue and adjusted OIBDA were above Street consensus. We expect that these results, coupled with strong industry tailwinds, will set us up for solid performance in the fourth quarter and finish the year strongly. As Tom shared earlier, the third quarter saw the continued recovery of the cinema industry led by Barbenheimer driving a 28% increase in total revenue compared to the same period last year. We also saw several major advertising categories show signs of recovery and momentum throughout the quarter. Nationally, the third quarter of 2023 saw the return of two historically top spending categories that were slower to come back into the cinema marketplace post pandemic, wireless and insurance. At the same time, NCM saw continued investment from the entertainment, automotive, and travel categories, which rely on the young, diverse and affluent cinema audiences. In our local sales business, we saw productivity levels increase during the third quarter with average revenue per sales executive increasing 34% compared to the prior year, an increasing 50% compared to the same period in 2019. NCM’s total revenue for the third quarter was $69.6 million, compared to $54.5 million for the same period in the prior year. National advertising revenue increased to $52 million, up 31% compared to $39.7 million in the third quarter of 2022, driven primarily by an increase in impressions sold and attendance. Local and regional advertising revenue increased to $12.9 million, up 32% compared to $9.8 million in the third quarter of 2022, driven primarily by an increase in contract activity and average deal size within the beverage, government and healthcare service categories. Turning to our expenses. This quarter, we incurred a significant amount of one-time expenses related to our Chapter 11 restructuring. Third quarter operating expenses were $220 million compared to $58.7 million in the prior year. Out of the $220.3 million in expenses in the third quarter, there were $162 million in charges related to our financial restructuring, other one-time items, depreciation, amortization, and non-cash share-based compensation. Excluding these charges, pro forma operating expenses were $58.3 million compared to $47.5 million in the prior year. The increase in pro forma operating expenses was mostly related to higher theater access fee and affiliate costs from increased attendance, the new Regal affiliate agreement and increased commission costs from higher revenue compared to the prior year. Since the new Regal relationship is an affiliate agreement, the expense of the agreement was reclassified from ESA theater access fees and revenue share to advertising operating costs, which is where all the costs of our network affiliates reside. Third quarter adjusted OIBDA, excluding non-cash charges, and one-time items was $11.3 million, compared to $7 million in the prior year for a 61% increase. Additionally, margin improved by 340 basis points to 16.2% compared to 12.8% in the third quarter of 2022. Throughout our financial restructuring, we work diligently to keep expenses in line and we’re ultimately able to operate more efficiently this quarter compared to the prior year. Turning to our consolidated balance sheet. At the end of the third quarter, the company had $23 million of cash and equivalent and total debt of $10 million compared to total debt net of cash of $1.1 billion at the end of 2022. Changes in debt were related to our financial restructuring, which was completed in August of 2023, resulting in the reduction of approximately 90 million in annual fixed charges. We also eliminated certain non-profitable exhibitor contracts and restructured or eliminated office leases, which resulted in a combined $8.3 million in annual cost savings. Additionally, we entered into a $55 million ABL facility with CIT Northbridge. Upon the effectiveness of the agreement, we drew $10 million from the facility, which represents the only amounts currently outstanding under the ABL and the minimum amount required to be drawn. Further, our financial restructuring resulted in a simplified ownership structure through which NCM Inc. now owns a 100% of NCM LLC and continues to serve as its manager. A year ago prior to the Regal agreement and our financial restructuring, NCM Inc. owned 47.5% of NCM LLC. Following the completion of our financial restructuring in August, the Board of Directors and our stockholders approved a reverse stock split of our common stock at a 1/10 ratio. NCM currently has 96.8 million shares outstanding following the reverse stock split, cancellation of Regal’s shares and the issuance of shares in accordance with NCM LLC’s plan of reorganization, each of which took place in August, 2023. Turning to guidance. We will be guiding NCM LLC standalone for the fourth quarter of 2023. To reiterate, this quarter, we presented NCM LLC’s operating results given the deconsolidation and reconsolidation that occurred due to our financial restructuring. Moving forward, given the reconsolidation of the two entities, NCM Inc, and NCM LLC’s results will be very similar. Looking ahead, we expect revenue for the fourth quarter of 2023 to be between $85 million and $88 million. In addition, we expect adjusted OIBDA for the fourth quarter of 2023 to be between $30 million and $33 million. With no debt, an unlevered balance sheet in industry tailwinds, NCM is well positioned for growth. The company generates significant free cash flow due to low capital expenditures, and with an adjusted OIBDA to free cash flow conversion of greater than 80%. NCM has numerous opportunities to return value to shareholders as the industry recovers. NCM simplify corporate structure will also enhance NCM’s financial flexibility and promote growth for future success. Operator, please open the line for questions.

We will now begin the question-and-answer session. [Operator Instructions] Today’s first question comes from Jim Goss with Barrington Research. Please proceed.

Okay. Good afternoon. I have a couple of questions. First, given, what you just said Ronnie, is there a reason to keep both NCM and NCMI alive? Is it reserved for future use in case there might be some reason? Why are they so separate?

So that, Jim, thank you for the question. That’s a good question. So it is, the company actually preserved the structure of both Inc and LLC given the original – when we originally founded the company back in 2007 for tax purposes. And so keeping that structure in place is still advantageous for the operations of the company.

Okay. And perhaps, Tom, do you think, are there revamped business aspirations some broadening of your – what you intend to do or should you be staying focused on restoring a more robust performance of the existing platform before you make any other steps? For example, your platform is noted to be 18,400 screens. I think you mentioned a 1,450 theaters, 190 DMAs. While this is very extensive, the full U.S. screen base is about 40,000 and while some are with arrival and some may not be worthwhile, should you be expanding the platform? Should you be partnering in any other ways? How are you looking at the business right now coming out of this black period?

I think what you asked is a really important question. I think I would go back to looking at what happened in the restructuring. And when you think about where we are, we eliminated $90 million of our annual fixed charges. So these additional resources provide us with an opportunity to really assess all the options that you mentioned. But also focusing and deploying that cash in a manner that really provides the best return to shareholders, and whether that's a combination of growing our existing cinema platform or doing potentially other things, that's what will be informing our shareholders and the market over the coming quarters. What I think is really encouraging, Jim, is when you look at our balance sheet and you look at our cost structure, we have a lot of options, and we plan to make the most out of this opportunity, particularly focusing on the cinema business.

Okay, maybe one last one for now. What share of ad revenues in the fourth quarter are locked up with upfront agreements or make good eatinginto any of the Q4 revenue projections that might cause that slight decline, I think you've noted?

I'll let Ronnie take that one.

Yes. So for the fourth quarter guidance, just speaking of national advertising, roughly 70% of that is estimated to be from the upfront market and so the remaining 30% is via the scatter market. And can you just restate the second part of your question again, Jim?

I was just thinking, do you have any make goods that might be eating into the fourth quarter, what expectations?

Yes, so we've – as you know, we've done – historically done a very good job of managing our make goods and our audience deliveries with our advertisers. Like every – frankly, like every fourth quarter, we will be eating some of that make good because that is the goal, but there really isn't a lot to speak of here.

Okay, thanks. I'll let it go at that.

Thank you.

The next question comes from Mike Hickey with The Benchmark Company. Please proceed.

Hi, Tom, Ronnie, nice to hear from you guys again. Congratulations on your quarter and your emergence here. Just two questions. One, it looks like we're close here to getting a resolution, Tom, on the strike. Maybe you've already heard, I don't know, it sounds like they had a breakthrough and fingers crossed here that they get a deal done. Just curious if you can sort of expand upon how the strike has impacted your business in thinking about 4Q and 2024 and the fact we do get a resolution here, which, again, fingers crossed, how you're thinking about the 2024 market growth opportunity. That's the first question. Second question is…

Let me answer that one. Let me answer that one first…

Yes, okay.

…and then we can go to the second one because I want to make sure I remember everything you asked.

Yes, absolutely.

So there has been no impact on this year's business from the strike in terms of the cinema ad business. There was definitely some noticing of it in the upfront. Some of our entertainment specifically related advertisers were focused on the next 12 months. But what will happen is, assuming this gets resolved, Mike, in the next couple weeks, which I think we're all optimistic about based on what happened today, it will take a probably 30 to 60 days for the studios to figure out where they are from a production point of view on the movies that are scheduled for 2024. So presumably within a relatively short time, they will get the actors' schedules and their own production schedules sorted out. So we can't give any more visibility on 2024 until they really make those announcements. There have been three movies that have moved from 2024 to 2025. I suspect there will be additional movements going back and forth between 2024 and 2025, but you'll know a lot more about that in the next, I would say, 30 to 60 days from the time the strikes resolved. And hopefully that will be well before Thanksgiving. What's your second question?

Tom, just – just part two here, first question, if the box is sort of flat to slightly down next year, do you think you can still grow your business in that sort of environment?

I think our goal is to look at 2024 regardless of how the box office and attendance looks as an opportunity to grow revenue per attendee. And I think realistically now that we have the restructuring behind us, and we've got an opportunity to really devote all of our attention and resources towards cinema advertising, I am optimistic that we can grow revenue per attendee next year.

Thanks. Part two here, second question, your 4Q guide looked great versus expectations. But year-over-year, a little bit down in revenue, a little bit more down in EBITDA. Just hoping Ronnie you could give us sort of the puts and takes there on 4Q. And I imagine given the hell that you guys have gone through, you're probably being a bit conservative here, not to say that you are, but how are you thinking about philosophically guiding in this environment? Thanks, guys.

So the fourth quarter this year, what went into our guidance is assuming that the softness that we see in the scatter market continues for the rest of the year. That's really what's kind of reflected on our estimate when you compare that versus the last year being slightly down. The adjusted OIBDA is obviously a reflection of some of that, but you also – here you have what the difference is also the new Regal Affiliate Agreement is baked into – obviously is baked into the fourth quarter of this year, which is on a different set of economics versus the prior year.

Thanks, Ronnie. Thanks, Tom.

Thank you.

At this time, we are showing no further questionnaires in the queue, and this does conclude our question-and-answer session. I would now like to turn the conference back over to Tom Lesinskifor any closing remarks.

Thank you for the questions and of course all of your support and interest in National CineMedia. With audiences continuing to return to cinemas each and every week, there is a lot to be optimistic about when it comes to National CineMedia and cinema advertising. With an exciting slate of content lined up for Q4 and several advertising categories showing signs of momentum throughout the quarter and positive trends in the cinema ad space, we look forward to a strong finish to this year and are optimistic about the future potential of the cinema ad business as the cinema industry recovers. So I want to thank the entire National CineMedia team and all of our offices across the U.S. I want to thank the NCM board for all their hard work and particularly thank our shareholders and our advisors for their support and guidance over the past year. We appreciate you joining the call today and look forward to seeing all of you at the movies. Thank you very much.