NCMI - NASDAQ

Good day, and welcome to the National CineMedia, Inc. Q1 2024 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Chan Park, VP of Finance. Please go ahead.

Good afternoon. I'm joined today by our Chief Executive Officer, Tom Lesinski; and our Chief Financial Officer, Ronnie Ng. I'd 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. The 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 the 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, Chan, and good afternoon, everyone. Welcome to our first quarter 2024 earnings call. The first quarter of '24 once again demonstrated that consumer demand for the movies is strong. The domestic box office brought in $1.6 billion this quarter, exceeding expectations and ending with great momentum, showing areas of strong performance and enduring interest in cinema. Films such as Dune: Part Two and Kung Fu Panda 4 led the box office during the quarter, bringing in $400 million collectively. During - Dune Two's opening of $82.5 million was more than double the box office opening of the original Dune film. Additionally, several titles performed better than estimates. including Mean Girls and Bob Marley: One Love. Mean Girls eclipsed studio projections by 40% in its opening weekend, while Bob Marley: One Love finished nearly 70% above its first week projections. Additionally, this quarter, we saw continued consumer just in nontraditional content, including Cabrini in the fourth season of The Chosen series. Meanwhile, other titles were very successful in reaching targeted demographics including Kung Fu Panda, where 56% of the audience was comprised of families and the Demon Slayer sequel, which attracted -- in the audience were 77% of the moviegoers were diverse ethnicities. Although the first quarter reflected the leering effects of the industry strikes, including limited product availability and postponed releases, a wide range of films delivered outsized results. Film production is up and running again, and we are optimistic about the growth of film volume in the coming years. While it is typical for the first quarter to be seasonally low for advertising, we are encouraged that NCM experienced strong revenue as the box office continues to recover. We have consistently proven that as a result of our differentiated offering and high ROI for advertisers that our revenues are more resilient despite the overall advertising climate being slower as a whole. Additionally, as we look across the advertising industry, we have continued to see speeding bounce back across several categories and coupled with the resilience of consumer spending, we expect a more significant rebound in the coming quarters. In the first quarter, NCM attendance was 75.8 million. As previously mentioned, the first quarter attendance levels were largely impacted by strike-related delays which pushed titles like The Fall Guy and It Ends With Us and others out of the first quarter. These changes to the slate negatively impacted attendance by approximately $11 million. If these films had not been postponed, we estimated that our total first quarter evidence would have been on par to '23 levels. As we've noted on prior calls, when the movies are there, audiences consistently show up to the cinema due to its diverse range and wide array of highly anticipated releases. U.S. box office has catered to all demographics and movie lovers in the quarter. Our core demographic Gen

Thank you, Tom, and good afternoon, everyone. The first quarter was a solid start to the year, exceeding our expectations with improved revenue and profitability. Despite the first quarter being seasonally slow for both advertising and movie attendance, we are pleased that our key fundamentals continue to improve as revenue per attendee reached 95% of 2019 and inventory utilization surpassed 2019. These improving fundamentals led to national advertising being up 31% and advertising revenue per attendee up 35% when compared to the same period the prior year. Our ability to capture additional revenue per attendee and disciplined expense management resulted in another quarter of stronger-than-expected adjusted OIBDA. First quarter 2024 total attendance also surpassed our expectations, largely due to the late additions of 17 titles with an opening weekend box office greater than $1 million. We were also able to drive higher monetization of impressions as a result of stronger demand in both the upfront and scatter markets. Utilized impressions per attendee increased 62% in the first quarter when compared to the same period the prior year. Despite lower year-over-year attendance in the first quarter due to the writers and actors strikes, we were able to significantly increase total advertising spend from certain key advertisers. The top 10 national advertisers from this quarter increased their spend by over 28% collectively compared to the first quarter of 2023. We saw strong growth across a number of traditional categories such as wireless, insurance, consumer packaged goods and pharmaceutical. Although we continue to navigate through a choppy advertising market, we experienced growth in both the upfront and scatter markets due to improved utilization and firm pricing discipline throughout the quarter. In fact, the utilization for the quarter was 12% above 2019, while maintaining similar pricing levels. NCM's total revenue for the first quarter was $37.4 million, up 7% year-over-year and exceeding our revenue guidance of $34.5 million to $35.5 million. National advertising revenue increased to $29.5 million compared to $22.5 million in the first quarter of 2023, driven by a 62% increase in national advertising utilization year-over-year as well as a slight increase in national CPMs. Local and regional advertising revenue was $5.3 million, down 34% compared to $8 million in the first quarter of 2023. This was driven primarily by a 16% decrease in attendance due to a reduced movie slate as a result of the writer and actor strikes in 2023 and certain prior sales in government and travel categories not returning in the first quarter of 2024. Beverage revenue derived from the ESA Parties beverage agreement decreased $1.8 million to $2.6 million or 41% compared to the prior year. This decrease was due to the termination of the Regal ESA in 2023 and the resulting discontinuation of their beverage revenue, combined with a 9% decrease in the remaining ESA Parties attendance year-over-year. Turning to our expenses. First quarter operating expenses were $60.1 million compared to $65.5 million in the prior year. Operating expenses in the first quarter included onetime charges such as $1.5 million related to our previously announced cost savings initiatives and $2.3 million related to fees and expenses from the company's financial restructuring in 2023. Excluding onetime items, depreciation, amortization and noncash share-based compensation, our adjusted operating expenses for the first quarter of 2024 were $43.1 million, 6% lower compared to $45.8 million during the same period last year. The decrease in adjusted operating expenses was primarily driven by lower network attendance, leading to decreased fees due to the ESA Parties and network affiliates, coupled with lower personnel and overhead expenses from our cost savings initiatives. First quarter adjusted OIBDA, excluding noncash charges and onetime items was negative $5.7 million, up 48% compared to negative $10.9 million in the prior year. This result exceeded our guidance range of negative $7.5 million to negative $6.5 million. Turning to our consolidated balance sheet. At the end of the first quarter 2024, the company has $60.1 million of cash, cash equivalents, restricted cash and marketable securities compared to $37.6 million at the end of 2023, while our total debt balance remained unchanged at $10 million. As Tom mentioned, we reported our highest free cash flow in the last 15 quarters. Total free cash flow for the quarter was $22.6 million compared to $9.4 million in the same quarter the prior year. Last quarter, as Tom discussed, we announced that our Board approved a new share repurchase program authorizing the company to purchase up to $100 million of shares of our common stock, demonstrating our confidence in the long-term strength of our business and our commitment to deploying capital in a disciplined manner to maximize shareholder value. Since the launch of this program, we have repurchased 649,164 shares for $3.2 million at an average share price of $5. This included the redemption of Cinemark's LLC units of 131,816 units. We plan to continue to opportunistically repurchase shares at prevailing market prices over the next 3 years while also continuing to invest capital in growing our advertising network through new innovations such as programmatic and self-serve. Turning to guidance. For the second quarter of 2024, we expect revenue to be between $49.5 million and $51.5 million. In addition, we expect adjusted OIBDA for the second quarter of 2024 to be between $3.5 million and $4.5 million. With a strong financial foundation and unparalleled product lineup, NCM stands poised for future growth. Thanks to minimal capital expenditures, the company is primed to yield substantial free cash flow. With the combination of the share repurchase program and improved attendance monetization, NCM presents numerous avenues to create value for its shareholders. Operator, please open the line for questions.

Thank you. [Operator Instructions]. The first question comes from Eric Wold of B. Riley Securities.

I guess -- first off, I guess, maybe excluding kind of the ebbs and flows of the film slate and any impact that may have on decisions. Maybe talk a little bit about the visibility you're seeing with your advertising partners. Any shifts forward or back in terms of how far out they're willing to book and kind of how confident they are in kind of putting budget to work a quarter or 2 kind of down the road versus maybe where you stood a year ago?

I guess I would look at it this way, Eric. First of all, thanks for the question. The scanner market has definitely been picking up, and we're seeing good visibility on that looking ahead in the next couple of quarters. But what I would say is that the upfront is really just starting to take off right now in these past couple of weeks. And over the next 2 months or so, we'll get a true indication of the market's bullishness on cinema, which we expect to be really good. It's really the first upfront that we've had since [ really early ] 2019 that will actually have an unencumbered, [ non-strike threatened ], nonpandemic affected outlook on the industry. And I think based on how the last couple of quarters have gone, we're really optimistic about the commitments that we see people making in the long run against the movie cinema business.

Got it. And then kind of a follow-up. Maybe think about -- you talk about the philosophy behind your quarterly guidance. I know you're focused on quarterly guidance right now as opposed to annual given kind of the uncertain environment around. But maybe kind of what -- maybe frame up how you kind of build up to that guidance as -- dynamics including what's included in there around your contractual upfront scatter. How much kind of assumptions are you're trying to make over the next 2 months in terms of kind of the real-time demand that comes in versus kind of what's already been booked to this point?

Yes. So that's a good question, Eric. So like Tom said before, the upfront doesn't -- we don't really start getting in some confirmation of the [ upper month ] market for another couple of months. And although the scatter market is improving, this year was really difficult for us to kind of call it, get back to annual guidance just given the unknown of the movie slate while it's still moving around. Obviously, that's a big piece of providing guidance, not in terms of just the revenue of also our operating expenses as well. So we're really looking for a little bit more stabilization there, and we believe in 2025, that will be the case. So I think that, coupled with the improved scatter market kind of tracks well to eventually getting back to giving annual guidance.

Okay. I apologize. My question is more kind of on the Q2 guidance, quarterly kind of frame up how you're kind of building up that, I guess, with 1 month in the bag for this quarter. Kind of how do you kind of build up the next 2 months in terms of what's already been booked for those 2 months versus what may be kind of on the [ comp ], kind of how much you would kind of put it to that...

Yes, that's definitely -- yes, that's a very good question, sorry. So quite frankly, we have pretty good confidence right now in -- for the remainder of the second quarter. A lot of that is already booked and in place. I think the trajectory and momentum we're getting in the scatter market obviously, gives us a little bit more confidence about what we still need to book. And so we believe most of that is baked into our guidance.

Helpful.

The next question comes from Jim Goss with Barrington Research.

Okay. I was wondering about the national local mix shift in favor of national. How much of the -- how much did the beverage contract have an impact on that? Can you talk about what -- if you think there will be more of a national flavor going forward?

Yes. So the -- again, just to be clear, the beverage piece is separate from national and local. So beverage is obviously just tied to the attendance and our contracted CPMs with our ESA partners. In terms of the mix shift that we've seen here in the first quarter, I think, frankly, one, we're seeing a better marketplace for national, again, just scatter doing much better. So I think that's why you're seeing, call it, the increased pace in national. And in terms of local, it's really, as we said in the start of the call, it's really kind of 2 things that's happened in the first quarter. One is really the attendance did -- the lower attendance on a year-on-year basis for first quarter did negatively affect local sales, quite frankly. And then secondly, there were 2 notable contracts, mostly from the government space that did not return. However, with that said, we do expect more of a mix shift -- shifting at least for this year, a little bit more towards national, just given the confidence that we have in the scatter market.

Okay. And I know one of your aspirations has been expansion beyond the cinema walls. I wonder if you could talk any -- a bit about what you might expect, what do you think might be most exciting and how and where that would develop?

Jim, can you -- I missed the first part of your question. Can you repeat the first part of it?

Well, I think one of the things you have aspired to is to go beyond just advertising within the cinema, to be in some related areas. And I'm wondering what you -- if any plans are underway to do something like that? I think part of it is you have an ability to track who is where and where they're headed. But perhaps there are other things that might be in your plans. And I'm just wondering if you might share any of that.

So we haven't given a lot of specificity around what we might do outside the cinema. We have been in the digital out-of-home space for a couple of years now. We're currently active in convenience stores as well as in other digital out-of-home venues, including college campuses. And we've learned a lot about those businesses, and we find them as very perfectly corollary to what we're doing. At this point, though, we're focusing to lion's share of our attention really on the cinema business. It's only been a little over half year since we came out, so we want to optimize really where we are with our existing cinema business. And then as we get through this next upfront, I think we can really focus a little more potentially on diversifying the business more. But right now, our core focus is really on taking advantage of the momentum we have right now, particularly going into the critical upfront period over the next couple of months.

[Operator Instructions]. The next question comes from Mike Hickey with The Benchmark Company.

Great quarter, guys. I guess the first one, Tom, just curious kind of 2 X factors this year. One is the political ad environment, which obviously is going to get nutsy here soon if it hasn't already and you kind of wonder if this is -- kind of push out some of the inventory in traditional ad networks. And if you think that you're sort of in a position to benefit from that push out. And I think you're also doing no political ads. So does that sort of give you more of a clean -- call it, clean medium for your media buyers? And the second piece on that, the economy, it looks like the consumer is showing a little bit of headwinds here in certain categories. Just curious how resilient you think your top categories are to pull back in consumer spend in terms of impacting [ the outcome ]...

Let me handle the first question, and then I'll let Ronnie respond on the segmentation on the categories. So political has always been an opportunity for us, but not in the way you would think. What typically happens in swing states, in particular, is local inventory gets sold out. So we have a team of people that are focusing on all of those states and cities and major ADIs knowing that there are advertisers who will be blocked out of local advertising [ avails ]. And since we can offer any political advertising option, we are always looking at how we can take advantage of sold-out inventory. So we're actually pretty optimistic that come November and even before November, that much of that availability, which will be gone, will benefit us. And in fact, over the last couple of elections, we've seen that effect. And it's real, and we know exactly where to go to those states and those ADIs where there are going to be sell-out situations. As it relates to the economy and categories that are growing, I think -- or declining, it's really tricky to look at it quarter-to-quarter because it isn't necessarily indicative of a trend. But Ronnie, you can talk about the various categories and what's growing and what.

Yes. So I would say just 1 in terms of any pullback from consumer spend, I think the last time we've seen a major recession, call it, it was back in 2008. The company actually fared fairly well through that recessionary period and was fairly resilient, especially compared to the rest of the media landscape. If we look at kind of our exposures and our typical top 10 advertisers, most of our advertisers are our guys that -- our advertisers, sorry, that are more stable to consumers that consumers always tend to spend money towards. So we feel we have an advertiser group, especially in the top 10, top 15 advertisers that are pretty resilient in and of themselves in terms of their business model. So in some of those categories, quite frankly, government is a good one where the spend is typically very stable. The insurance category is another one, and that's also very stable as well. So we feel we have a stable core of advertisers, frankly, that should be able to weather any type of consumer slowdown.

Nice guys. Then Ronnie, on your 2Q guide, can you give us a little bit more color on the decline in revenue? And I guess, top line is fine. In terms of quarter-over-quarter of Q2 last year is a fair comparable or if it's -- it needs to be adjusted in terms of understanding your growth outlook? And is this primarily just the presumed weakness in attendance given the slate in 2Q? Is that the major impact that's driving your guidance to be down year-over-year? Or any color there would be great.

Yes, that's -- you're really spot on there. It's really -- the second quarter guide is more of a reflection of our current expectations of the overall attendance versus -- for the second quarter versus the prior year. The -- again, the slate is meaningfully down. And I think if you actually compared the second quarter slate for this year versus last year, you'll see that. So if the attendance were to come in a little bit stronger than our expectation, then there's a chance for our -- for the actual revenue to maybe come in above that. But frankly, the reflection of our guidance is really driven by the attendance level.

This concludes our question-and-answer session. I would like to turn the conference back over to Tom Lesinski for any closing remarks.

Well, thank you for your questions and your ongoing support of National CineMedia. Leveraging our unparalleled scale within the industry, NCM maintains its position as a frontrunner in the premium video ad space. And with our highest free cash flow in the last 15 quarters and our best first quarter since 2019, NCM demonstrated its perseverance in a down market and its ability to continue delivering sought-after audiences driving new brands to our platform and, of course, existing ones to return. So I want to again thank the entire NCM team and Board for their hard work. Thank you to our shareholders for their ongoing support. And we appreciate you all joining this call and look forward to seeing you all again at the movies. Thank you.