Greetings. Welcome to National CineMedia, Inc. Q2 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

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

Thanks Kevin. Good afternoon, everyone. I am joined today here in Denver by our CEO, Tom Lesinski; and our Chairman of the Board, Mark Segall.

I'd like to remind our listeners that this conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

All statements other than 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, which may be found on the Investor page of our website at www.ncm.com. Now, I'll turn the call over to Mark..

BBDO, Foote, Cone & Belding, and Procter & Gamble's Clairol Inc. I am now pleased to introduce Tom, for the first time, as NCM's new CEO.

Tom?.

Hobb's & Shaw, IT2, Frozen and of course, Star Wars Episode 9. These films, along with several upcoming releases, are expected to drive a strong finish for the 2019 box office.

As I mentioned, the upfront ad market has been strong, and we are seeing healthy demand from advertisers as we head into the key back-to-school and holiday seasons as brands continue to view cinema and our digital offerings as a powerful captive environment to reach cinema's valuable young engaged audiences.

I'll now turn the call over to Katie to give you more details about our Q2 2019 operating performance and to reaffirm our 2019 guidance estimates.

Katie?.

Thanks Tom. I will walk through the operating results that Tom highlighted in further detail; discuss our thoughts on the quarter as well as our full year outlook. Then, we'll open the call to your questions. We will be providing a supplemental presentation of these results on our website for your future reference.

For the second quarter, our total revenue was $110.2 million compared to $113.7 million in Q2 2018, a decrease of 3.1%. This $3.5 million change was driven by a $1.2 million decrease in national advertising revenue, $1.5 million decrease in regional revenue, a $400,000 decrease in local revenue, and a $400,000 decrease in beverage revenue.

Total Q2 adjusted OIBDA was $50.2 million, a decrease of $2.1 million or 4% versus Q2 2018.

The adjusted OIBDA margin for the quarter was 45.6% compared to 46% during the same period last year, primarily due to a decrease in revenue, partially offset by $1 million in lower operating expenses, driven by a decrease in legal and professional fees, which were incurred last year related to negotiation of a settlement agreement with our largest stockholder.

Our theater access fees were flat compared to last year, but we had a decrease in the attendance portion of the fees related to lower box office attendance compared to a year ago, which were offset by an increase in digital screen fees, which increased 5% annually.

The Q2 and year-to-date decrease in national revenue was driven by a weaker scatter market compared to a strong scatter market last year.

In addition, as Tom mentioned earlier, the weaker-than-expected June box office continue attendance contributed a record second quarter make-good ending balance of $5.7 million compared to $2.5 million a year ago, a swing of $3.2 million at quarter end and compared to $4.7 million Q1 2019 ending make-good.

For the second quarter 2019, national ad revenue was $77.6 million, a $1.2 million or 1.5% decrease versus Q2 2018. The change was driven by a $3.2 million increase in the quarter end make-good balance, a 10.4% decrease in CPMs, partially offset by a 4.3% increase in impressions sold and higher branded content revenue.

The increase in impressions sold was driven by a 9.3% increase in inventory utilization to 110.8% from 101.5% in Q2 2018, as we delivered impressions from the first quarter end make-good balance during the quarter, partially offset by a 4.5% decrease in attendance versus prior year.

The decrease in CPMs is driven by a shift to higher Q2 2019 upfront spending versus higher scatter a year ago. Also recall, last quarter, we had some high CPM upfront clients run campaigns, resulting in almost a 10% CPM increase in Q1. Looking forward, we expect CPM to normalize resulting in low single-digit growth in 2019.

Q2 regional ad revenue decreased 18.3% or $1.5 million from $8.2 million to $6.7 million versus the second quarter of 2018 and was primarily due to a $1 million shift in spend within the automotive category, as one client shifted their spending from regional advertising to national advertising.

That said, Q3 is trending up year-over-year, and we expect regional revenue to bounce back in the second half of 2019 as our shift in sales strategy, Tom mentioned earlier, is gaining traction. Q2 local ad revenue slightly decreased 2.2% or $400,000 from $18.1 million to $17.7 million compared to last year.

The decrease in local advertising revenue was due to a 7.7% decrease in the volume of local contracts and a 2.1% decrease in average contract value. This was partially offset by strength in our local digital sales revenue that Tom mentioned earlier.

Q2 beverage revenue decreased 4.7% or $400,000 from $8.6 million to $8.2 million versus Q2 2018, driven by a decrease in founding member attendance, partially offset by a slight increase in beverage CPMs year-over-year.

Our Q2 2019 advertising revenue mix was 71% national, 6% regional, 16% local, and 7% beverage versus Q2 2018 that was 69%, 7%, 15%, and 8%, respectively. For the first six months of 2019, total revenue decreased 3.5% or $6.8 million to $187.1 million from $193.9 million in the first six months of 2018.

Adjusted OIBDA decreased $3.3 million or 4.4% to $72.3 million from $75.6 million in the first six months of 2018, and adjusted OIBDA margin decreased to 38.6% from 39% versus the first six months of 2018. For the first six months of 2019, national ad revenue was $131.6 million, a $2 million or 1.5% decrease versus the first 6 months of 2018.

The decrease was driven by 2.2% decrease from CPM, a 1.4% decrease in impressions sold, partially offset by an increase in branded content.

The decrease in impressions sold was the result of an increasing utilization to 107.8% from 98.4% as we continue to deliver impressions this year to satisfy the record $8 million year end 2018 make-good as well as from network attendance that decreased 10% versus the first six months of 2018.

As mentioned earlier, on a year-over-year basis, we expect a stronger performance in the second half of this year for our national advertising business. For the first six months of 2019, regional ad revenue decreased 16.5% or $2 million from $12.1 million to $10.1 million versus the first half of 2018.

Half of this decrease is driven by the shift from regional advertising to national advertising by a major automotive client. As our new regional sales strategy begins to take hold, we expect a stronger second half of 2019 resulting in year-over-year increase in our regional ad business.

For the six months of 2019, local ad revenue decreased 3.5% or $1.1 million from $31.6 million to $30.5 million compared to last year. The decrease in advertising revenue was due to a 10.2% decrease in the volume of local contract, partially offset by 2.3% increase in average contract value combined with the higher local digital sales revenue.

For the first six months of 2019, beverage revenue decreased 10.2% or $1.7 million from $16.6 million to $14.9 million versus the first six months of 2018, and was driven by a 9.6% decrease in founding member attendance, partially offset by a slight increase in beverage CPMs.

For the second quarter, we reported GAAP diluted earnings per share of $0.11 versus an earnings per diluted share of $0.05 in Q2 2018. For the six months of 2019, we reported GAAP diluted earnings per share of $0.10 compared to earnings per diluted share of $0.03 in the first six months of 2018.

The increase in the EPS was related to lower tax expense in 2019 compared to 2018. In 2018, we recorded deferred tax expense related to revaluing deferred tax assets from decreases in state income tax rates.

For the first six months of 2019, capital expenditures were $6.9 million versus $7.2 million spent in 2018 driven by the relocation of our corporate headquarters in 2018, partially offset by increased investments in our digital infrastructure.

We are estimating that our full year 2019 capital expenditures will be in the $15 million to $16 million range or approximately 3% of revenue, including $7 million to $8 million of digital investment.

In the second quarter, and for the first six months of 2019, we recorded $5.7 million and $8.1 million, respectively, of integration and other encumbered theater payments from Cinemark and AMC associated with Rave Theaters and Carmike Theaters versus $5.6 million and $7.8 million last year.

As a reminder, note that these integration and other encumbered theater payments are added to adjusted EBITDA -- 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 $21 million to $23 million of integration payments from our founding members during 2019. It should be noted that these integration payments for AMC's Carmike theaters will continue to the life of BSA or to 2037.

Moving onto our balance sheet, our total debt outstanding at NCM LLC at the end of Q2 2019 was $925 million versus $950 million at the end of Q2 2018. Our revolver balance at the end of the second quarter 2019 was $27 million compared to $30 million at the end of Q2 2018.

Our average interest rate on all debt was approximately 5.8% at the end of Q2 compared to 5.6% in Q2 2018, including our $268 million floating rate term loan bank debt and revolving credit facility that had a rate of approximately 5.4%. Excluding revolver balances, 68% of our total debt outstanding at the end of Q2 2019 had a fixed interest rate.

Our way of reminder under our charter, we can pay down up to $15 million of our debt annually without founding member and Board approval. For the six months 2019, we have retired $5 million of our 2026 senior unsecured bonds for $4.6 million.

We are going to continue to evaluate this discretionary use of cash based on future expected leverage levels, LLC investment opportunities, and our public company dividend policy.

Our total net leverage at NCM LLC as of the end of Q2 2019 was approximately 4.2 times trailing four quarter adjusted OIBDA, which is well below our consolidated net total leverage maintenance covenant of 6.25 times. Our consolidated net senior secured leverage ratio was 3.1 times versus the covenant of 4.5 times.

Our consolidated cash and investment balances as of Q2 2019 was $62 million, with $57 million of this balance at NCMI. We currently have enough net cash available to cover over four quarters of dividends at NCMI with approximately $0.75 per share of cash on hand at the end of Q2 2019.

We announced today that the Board of Directors has authorized the company's regular quarterly cash dividend of $0.17 per common share of stock. The dividend will be paid on August 30th, 2019 to stockholders of record on August 15th, 2019.

The dividend level was determined based on our plans to invest in the business, while providing financial flexibility and a sustainable dividend for our stockholders.

The company intends to pay a regularly quarterly dividend for the foreseeable future at the discretion of the Board of Directors consistent with the company's intention to distribute over time a substantial portion of its free cash flow.

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

Our annual tax deferred dividend yield is currently 9.8% based on today's closing share price of $6.92. Now, turning to guidance, as we've noted earlier, we have a strong film slate that we are excited about in the back half of the year as well as easier quarterly comparisons. In addition, Q3 sales are trending ahead of last year.

We are reiterating our revenue guidance of up 1.9% to up 5.3% versus 2018, or in the range of $450 million to $465 million, and adjusted OIBDA guidance of up 0.8% to up 5.6% or in the range of $207 million to $217 million.

Looking ahead at NCM LLC's available cash calculation for 2019, starting with our adjusted OIBDA guidance of $207 million to $217 million, you will add the following as a build to available cash; one, integration payments of $21 million to $23 million; and two, cash payments from Fathom note receivable of $5.7 million.

Note, this is the last year we will receive payment for this note receivable.

As a reduction to available cash, you will subtract the followings; one, cash interest expense of approximately $53 million to $54 million; two, annual scheduled debt principal amortization of $2.7 million, plus any potential additional debt repurchases up to $15 million annually, of which we have already purchased $5 million; capital expenditures of $15 million to $16 million; and four, non-cash comp for Inc.

employees of approximately $2.5 million to $3 million.

These are the components that will allow you to arrive at a projection for available cash at NCM LLC at the end of 2019, which is paid to the 4 founding members of the partnership -- the four members of the partnership; Regal Cineworld, Cinemark, AMC and NCMI on a quarterly basis based on their ownership at the end of the quarter.

In addition to the available cash distributed to NCMI from NCM LLC and consistent with prior year, we project approximately $5 million to be paid to NCMI from NCM LLC for management fees, plus $1 million of interest earned on NCMI cash balances reduced by the expected payout of $15 million to $16 million for payments under the tax receivable agreement to our founding member.

This will allow you to arrive at net cash available to fund current annual dividend payments with the payout at the midpoint of that guidance of approximately 82%. This concludes our prepared remarks and we will now open the line for questions.

Operator?.

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jim Goss with Barrington Research. Please proceed with your question..

Good afternoon. I'm wondering first, you had mentioned early on about an expectation for a more scatter and less upfront.

I assume that will cut the make-goods issued down somewhat, is that a correct assumption?.

Yes, make-good is really a function of attendance. Our demand, obviously, has been there even in the first couple of quarters, but the attendance just wasn't there to be able to deliver on that.

So, as we move throughout the year and, hopefully, the attendance from these upcoming -- the upcoming film slate will hopefully meet or beat these expectations, so that will help us deliver on the outstanding make-good balances. .

Okay.

And I was wondering to the Noovie Pixar custom augmented reality you mentioned, are you in any of the efforts you're having or maybe it's premature yet? Are you drawing viewers earlier as you're hoping? And I'm wondering what sort of impact there might be or are you expecting on pricing demands? And is it helping local and regional ads in addition to the national?.

Let me give that--.

Yes, I am going to have our Cliff Marks, our President, respond to your question specifically..

Yes, just really started the Noovie program, we are measuring to see if it's going to get people there earlier. But -- that's clearly our intent, is to have people there playing games, so I can't really answer that question yet, but we are doing that research.

Locally, our local ad sales team are not selling augmented reality programs, but it's primarily being sold by our national team. So--.

But we know that digital -- this is Tom. We know that digital has been a useful tool for the local and regional salesforces and has contributed to some of the growth we've seen come back in the local business..

Yes, very strong sales digitally, but not the augmented reality part locally..

And maybe lastly, for now, I'm wondering if there is any linking of digital ads to the attendees following the movies? And does the relationship with the founding numbers loyalty program identification facilitate such a notion, where you might be able to follow sending them push ad or that sort of thing that might tie into the ad sales on screen?.

We actually have a really clever product called Cinema Accelerator. And our Cinema Accelerator product is a retargeting product by design exactly as you noted. And when people come into our theater, we are actually able to track that phone and able to follow them when they leave on an optimum basis, of course. We are able to follow oneself.

If a person leaves our theater and goes to a Walmart or goes to a McDonald's, we can actually measure that and then we could target them while they are in the McDonald's or while they're in the Walmart. So, Cinema Accelerator has been a very successful product, generates most of our digital revenue, and it's quite a good product..

And how do you monetize it, just lastly? Does that affect the rate you're able to charge upfront or--?.

Yes, the way we monetize it is we actually -- we'll sell brands and as Tom noted about 40% of our national advertisers, about 30% of our regional advertisers actually do this.

They will actually by schedule on-screen, and they know they've reached someone with their spot on-screen and then we target that same person over the next seven days in various places that, that person will be at.

Whether be it a restaurant, whether it be in a big-box store, whether it be at home on the couch, we actually retarget them in seven days by actually going in and buying ads on sites that they use.

That makes sense?.

Yes, it does. Okay, thanks very much..

You're welcome..

Thanks Jim..

[Operator Instructions] As there are no further questions left in the queue, I would like to turn the call back over to Mr. Tom Lesinski for any closing remarks..

I am proud to have the opportunity to lead NCM and its talented and hard-working management team and staff into the future. With the leadership and Board changes now behind us, I am optimistic about the growth and stock price appreciation potential of our business.

We are experiencing great demand from our advertisers, our audiences are excited about the future movie slate, and we have the strong support of our exhibitor partners.

I would look forward to working very closely with our NCM management team, our exhibitors, Mark, and the rest of our Board, and our NCM team to continue to drive our strategic vision and leverage our unique position in the media marketplace as the leading company connecting brands to highly desirable movie audiences throughout their entire moviegoing experience.

As Mark started this call, I will let him wrap it up as well..

Thanks Tom. But there is not much more for me to say. I know that I speak for our entire Board in saying that we are excited about the prospects of the company in your new leadership, and we get ready to support you and the company mission in any way that we can.

Thanks for joining us today and for all your patience and support, as we work through our Board and leadership changes..

This does conclude today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day..