Greetings, and welcome to the National CineMedia, Inc. Q1 2020 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Ted Watson, Senior Vice President, Finance. Please go ahead, sir. .

Thank you, Jerry. Good afternoon, everyone. I'm joined today by our CEO, Tom Lesinski. 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 and 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..

one, a hiring and personnel expense freeze that was instituted 2 weeks prior to the cinema closures; two, the suspension of all nonessential operating expenses; three, the termination or deferral of nonessential capital expenditures; four, the furlough of approximately 1/3 of our staff; five, a salary reduction of up to 50% for the 2/3 of our employees that remain, which, in aggregate, reduced wage expenses by 50% versus our run rate in February before the crisis began; six, reduced cash compensation of the company's Board of Directors by 20%; and seven, suspension of the company's 401(k) employee match program.

We also began to work strategically with our office-based landlords, vendors and other business partners to defer payments or abate certain costs altogether. Beginning in mid-March, we tightened the process for the payment of all major expenses which, among other things, require CEO approval for all outgoing payments.

Overall, this substantial and very difficult series of decisions has reduced our monthly core expense run rate, excluding our variable operating expenses, by nearly 50%. In addition to reducing our use of cash to operate our business, we have also taken significant steps to build our cash balances.

In mid-March, we drew down an additional $110 million from our revolving bank loan, which represented nearly all of our availability on that facility. And as mentioned, our sales and operating teams have been very focused on the collection of outstanding accounts receivable.

I am pleased to report that since the end of Q1, we've been able to collect $66.7 million of accounts receivable.

Between the temporary operating cash reductions we've made, the $169 million of NCM LLC current cash balance and our current accounts receivable balance of $47 million, we believe we have sufficient liquidity to sustain our operations for the next 18 months without any material in-theater advertising revenue.

Our plan during this crisis not only provides significant cushion to weather the theater closure and recovery period, it helps us maintain and possibly even gain video advertising market share when the economy normalizes.

All of these liquidity-sustaining measures we have taken have also received the support of our lenders and have allowed us to finalize a key amendment to our bank covenants.

On April 30, we amended the NCM LLC senior secured credit agreement dated June 20, 2018, to allow for the waiver of the financial leverage covenants for the quarter ending June 25, 2020, through the quarter ending July 1, 2021, provided that NCM LLC maintains a minimum cash liquidity balance.

NCM will also not be permitted to distribute its currently available cash to NCM, Inc. and the other NCM LLC members during the waiver period, unless certain requirements are met. Ted will get into more detail on this in a moment.

This waiver will allow us plenty of time to return to our pre-COVID-19 covenant structure as our business returns to a normalized state.

Fortunately, given our highly variable operating cost structure, NCM LLC can distribute available cash during the waiver period if it meets a minimum trailing 12-month adjusted EBITDA target and minimum credit facility balance.

We are also actively exploring the potential impact on our company of a variety of relief and stimulus measures under the U.S. government CARES Act. As the CARES Act makes changes to the U.S. tax code that are intended to benefit companies, we are currently evaluating the provision of the CARES Act to determine any potential benefit to the company.

No impact to this legislation has been incorporated within our Q1 financial statements as the CARES Act enactment occurred during the second quarter of 2020. While no government funding is currently being pursued, we will also continue to monitor new programs that may be created by Congress that are beneficial to NCM.

Finally, our Board of Directors has approved the payment of a $0.07 per share first quarter dividend by NCM Inc. to shareholders of record on May 18, 2020. This lower quarterly dividend will result in a current yield of 9.1% based on yesterday's closing share of $3.08. After the Q1 '20 available cash distribution of $4 million, the NCM Inc.

cash balance would allow us to pay dividends for approximately 12 quarters. Given the current market uncertainty, our Board felt that it was prudent to create a larger dividend payment cushion than we have historically held to ensure that we can continue to pay a dividend for the foreseeable future. Having said that, the NCM Inc.

Board will, as always, continue to review our dividend policy each quarter to ensure that we deliver on our plans to distribute substantially all of NCM Inc.'s free cash flow to public shareholders.

As you can see, our singular goal at this time is to do everything we can to ensure that NCM can operate efficiently during the COVID-19 crisis and is well positioned to capitalize on an ad market recovery and the pent-up demand, out-of-home entertainment experience provided by our cinema partners as we return to a more normal state of business.

We are focusing on maintaining a strong liquidity position while actively pursuing an increased share of the video advertising market and preserving the valuable relationships we have with our exhibition and advertising partners, the lending financial institutions that support NCM and our stockholders.

None of this would have been possible without the hard work and resilience of our NCM team during this unprecedented time. I'm especially thankful for the strength of our executive leadership team who've been working side-by-side with me every minute to keep our company moving forward and planning for the future.

I also want to acknowledge how hard it has been for all the people that have been furloughed or that have taken significant pay cuts.

As I mentioned, those choices were the hardest of my life, and their absence from the NCM family is expected to be temporary as I'm confident that NCM will make it through this crisis, and we'll be well positioned moving forward. Before I turn it over to Ted, I wanted to give you an update on our search for a new CFO at this time.

We've temporarily suspended the search process as candidates help their existing employers work through the crisis and as we focus on more immediate corporate priorities. In the meantime, our recently retired CFO, Katherine Scherping, is continuing to provide her expertise and guidance to me and the team as a consultant.

And of course, our Senior VP of Finance, Ted Watson, has been working well holding down the fort admirably. So thank you, Ted, and I'll turn the call over to you..

All right. Thank you, Tom. I will walk through the Q1 results in further detail, provide some more details on how to think about the cost structure of our business during this COVID-19 pandemic. Then we will open up the call to your questions.

We will be providing a supplemental presentation of these results and our COVID-19 update on our website for future reference. For the first quarter, our total revenue was $64.7 million compared to $76.9 million in Q1 2019 or a reduction of 15.9%.

This $12.2 million change occurred primarily in March as the COVID epidemic spread to the U.S., resulting in a $7.6 million decrease in national advertising revenue, a $3.4 million decrease in local advertising revenue and a $1.2 million decrease in beverage revenue for the current quarter versus Q1 '19.

Total Q1 adjusted OIBDA was $14.4 million compared to $22.1 million in Q1 2019, a decrease of $7.7 million or 34.8%.

The adjusted OIBDA margin for the quarter was 22.3% compared to 28.8% during the same period last year due to a decrease in revenue, partially offset by $6.2 million in lower operating expenses, driven by a decrease in variable costs that include theater access fees, affiliate advertising payments, sales commissions and a decrease in performance-based compensation as a result of the COVID-19-related closures of theaters in March.

Our Q1 2020 advertising revenue mix was 77% national, 15% local and 8% beverage. This compares to Q1 2019 that was 74%, 17% and 9%, respectively. As a reminder, beginning in Q1, regional revenue is now being combined with our national revenue.

Because of the significant impact of COVID-19 on our March results, an analysis of our Q1 2020 revenue versus Q1 2019 is not meaningful as it does not represent fairly our ongoing operations. While Q1 national ad revenue was 13.2% lower than Q1 2019, all of the negative variance came in the month of March.

The Q1 change was driven by a 9.4% decrease in impressions sold and an 8.7% decrease in CPMs. Q1 2020 19% network attendance decrease was related to March's network attendance decrease of 54% due to COVID-19 and the eventual temporary theater closures as well as a weaker movie slate in the early part of the fiscal month compared to 2019.

The decrease in theater attendance was partially offset by a Q1 2020 11.9% increase in inventory utilization to 104.5% versus 93.4% as our network was well sold when the virus hit.

The Q1 8.7% decrease in CPMs were driven by weakness in scatter CPMs throughout the quarter but especially exacerbated by the impact of COVID-19 during March, where scatter CPMs were down 19%. In addition, we had 2 customers with high upfront CPM spend in Q1 2019 that did not place any ads in Q1 this year.

We expect much of the lower Q1 and March CPMs can be attributed to ad placement timing. And while we would expect some market CPM softness as the economy reopens and brands begin to bring their ad spending levels back to normal levels, we would expect our national CPMs to benefit from the lack of new sports and other fresh TV programming.

Q1 local revenue was down $3.4 million or 26.6% to $9.4 million due to a 14.9% decrease in contract -- in the volume of contracts sold and a 16.5% decrease in the average contract value, in part due to COVID-19.

In some cases, we expect this local revenue to shift to later in 2020, or as Tom mentioned, some of it has been or will be shifted to our digital revenue.

Q1 2020 beverage revenue was $5.5 million, a decrease of 17.9% or $1.2 million versus Q1 2019 driven by a 19.4% decrease in founding member attendance, almost all of which happened in March, partially offset by a slight increase in beverage revenue CPMs in the first quarter of 2020 compared to the third quarter of 2019.

For the first quarter, we reported GAAP diluted loss per share of $0.05 versus a loss per diluted share of $0.01 in Q1 2019. Our capital expenditures were $3.3 million for the first quarter of 2020 compared to $2.8 million for Q1 2019.

The increase was driven by continued investment in our digital product development and the build-out of our consumer databases. Total capital expenditures are now expected to be between $11 million and $12 million in 2020 and versus our prior guidance of $14 million to $16 million or a decrease of 23% at the midpoint.

As Tom mentioned, much of our nonessential capital spending was delayed beginning in mid-March. However, we are continuing to invest in our new sales planning and inventory management platform that is in its testing phase and expected to launch in Q1 of 2021.

Given the strategic importance of these systems and our desire to hit the ground running when the crisis passes, we felt it important to push through the testing phase and stay the course with the implementation as planned.

During the first quarter, we recorded $1.4 million of integration and other encumbered theater payments, primarily for the AMC Carmike Theaters versus $2.5 million in Q1 2019. Integration and other encumbered theater payments decreased $1.1 million from the quarter ended March 28, 2019, to the quarter ended March 26, 2020.

This decrease is due to Rave cinemas coming on to our network, and thus, no longer being encumbered; and the decrease in adjusted OIBDA quarter-over-quarter, which is the driver of the calculation of payments.

You should note all integration and other encumbered theater payments are added to adjusted OIBDA for debt compliance and available cash calculation purposes but are not included in our reported revenue and adjusted OIBDA as they are recorded as a reduction to the net intangible assets on our balance sheet.

As Tom mentioned earlier, in anticipation of future noncompliance with our financial covenants, we have obtained a senior bank facility waiver to the extent we are not compliant with our net senior secured and total leverage covenants through the quarter ended July 1, 2021.

Our covenants are calculated using trailing 12 months of EBITDA as defined in the credit agreement. We are compliant with all our covenants at the end of Q1 2020, and we expect to be very close at the end of Q2.

Considering the impact of having virtually no revenue in Q2 2020 will have on our trailing 4-quarter cut net calculations, we and our banks felt it prudent to provide relief for a 5-quarter period beginning Q2 2020.

It is also important to note that we will be paying scheduled interest and principal payments on all of our indebtedness throughout the waiver period. Conditions for the covenant waiver for NCM LLC include maintaining a minimum liquidity of $55 million.

Also, NCM LLC will not be able to distribute any of its available cash as defined in the LLC operating agreement during the waiver period, unless at any quarter end, trailing fourth quarter-defined adjusted EBITDA is at least 120% of the 2019 minimum compliance adjusted EBITDA or $277 million.

And the amount outstanding of -- and the amount of outstanding loans underneath the revolver cannot exceed $39 million.

Conditions following the waiver include NCM LLC being in compliance with both its net consolidated senior secured and total leverage covenants, NCM LLC's consolidated net senior secured leverage ratio must be below 5x for the distribution of available cash to its owners.

We believe this waiver will allow us the flexibility needed to come back into compliance with our financial covenants as of the end of Q3 2021 and theaters open up and business operations normalize throughout the back half of 2020 and into 2021.

Looking specifically at our leverage, NCM LLC total net debt as of the end of Q1 2020 was approximately 4.3x trailing 4 quarters adjusted OIBDA plus integration payments versus 4.3x in Q1 2019, which is below our consolidated net total leverage maintenance covenant of 6.25x.

Our consolidated net senior secured leverage ratio was 3.3x versus a covenant of 4.5x. Moving on to the balance sheet. Our total debt outstanding at NCM LLC at the end of Q1 2020 was $1.1 billion versus $936 million at the end of Q1 2019.

The during the quarter, we drew down $110 million in additional funds on the revolving credit facility, resulting in an increase in our revolver balance at the end of Q1 2020 to $167 million compared to $37 million at the end of Q1 2019. Our average rate on all debt outstanding was approximately 5.1% at the end of Q1 compared to 5.8% in Q1 of '19.

This includes our $266 million floating term loan bank debt and our revolver credit facility that had a rate of approximately 3.9%.

It is important to note that there was no increase in our interest rate spread as a result of the bank amendment as we were only required to pay an amendment fee to banks that agreed to the amendment before the approval deadline. Excluding revolver balances, 70% of our total debt outstanding at the end of Q1 2020 had a fixed interest rate.

Our consolidated cash and investment balances as of Q1 2020 were $215 million with $83 million of this balance at NCMI.

With the increased cash balances related to the revolver draw and the accounts receivable collections, the NCM LLC net debt balance at the end of Q1 2020 decreased slightly to $930.7 million versus $930.9 million at the end of Q1 2019. As Tom mentioned earlier, our Board of Directors approved a Q1 dividend of $0.07 per share.

The dividend will be paid on June 1, 2020, to stockholders of record on May 18, 2020. With this lower dividend, we currently have enough NCMI cash available to cover nearly 12 quarters of dividends at NCMI with no other cash distributions received from NCM LLC after the Q1 2020 distribution of approximately $4 million.

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

The declaration, payment, timing and amount of future dividends payable will be at the full discretion of the Board of Directors who will consider general economic and advertising market business conditions, the company's financial condition, available cash, current and anticipated cash needs, and any other factors that the Board of Directors considers relevant, which includes short-term and long-term impact to the company related to the temporary theater closures for the COVID-19 pandemic and restrictions under the NCM LLC credit agreement.

Now I would like to provide you with some information regarding NCM LLC's cash burn rate, while theaters are closed due to the COVID-19 pandemic.

As mentioned earlier, while theaters are closed, NCM LLC's variable operating costs such as theater access fees, which included attendance base and digital screen fees, platinum revenue share, affiliate revenue share and sales commission costs, are significantly reduced or eliminated.

Outside of these expenses, the company typically has had approximately $9.5 million of monthly core operating expenses. These core operating expenses include headcount, marketing and research costs, professional fees, lease costs and other variable expenses.

Through a disciplined and multi-phased approach, we have reduced our core operating expenses by nearly 50% to a run rate average of under $5 million per month while the theaters are closed. As many of these costs can be delayed to later in this year, the average monthly cash burn rate will likely be lower in Q2 and Q3 of this year.

Also, we continue to evaluate our remaining costs and will further adjust our decisions as conditions warrant. In addition to our core operating expense run rate, the company has a debt service obligation that averages a little over $4 million per month remainder of the year.

With a total average cash burn rate of approximately $9 million per month, including debt service obligations and $169 million of cash on hand, plus $47 million in accounts receivable, the company has more than 18 months of liquidity to effectively run the business with no meaningful new revenue.

As Tom mentioned, even during the temporary theater closures, we continue to recognize some amount of digital revenue that will help offset some of our negative operating cash flow.

It is also important to note that given the variable cost, high-margin nature of our business, with the operating expense reductions we have made, once the theaters begin to reopen, NCM LLC can still cover debt service and operating costs with revenue that is approximately 40% of the 2019 level. Finally, turning to guidance.

As Tom mentioned, we have deliberately structured our operating and liquidity plans so that our advertising business can operate at a level necessary to aggressively compete in the advertising marketplace that is still very active so that we can be ready to hit the ground running when the theaters begin to reopen.

Therefore, considering this uncertainty with respect to when and at what rate, we will be able to begin recognizing in-theater advertising revenue due to the COVID-19 pandemic.

The company has withdrawn its previously provided 2020 revenue, adjusted OIBDA and integration payment guidance until we have better clarity as to the COVID-19-related elements that impact our future revenue and adjusted OIBDA.

During this period of uncertainty, we will instead continue to provide important liquidity measures such as AR collections, cash and net debt balances and monthly operating and debt service cash usage rates that we are using to manage our business over the near-term during the crisis.

This concludes our prepared remarks, and we'll now open up the lines for questions.

Operator?.

[Operator Instructions]. The first question is from Eric Wold, B. Riley FBR..

Tom and Ted. A couple of questions. I know you're talking to an uncertain environment out there, but you mentioned you're starting to head into the upfront buying season as it relates to next year, whether that next year ends up being kind of October, September over the calendar year.

Any sense, early read into that -- into the ad buying environment you're getting from your customers? Are sales cycles lengthening? Are they kind of a little more hesitant to commit upfront? Any adverse impact of CPMs? Just kind how do you think about kind of the light down tailwind you were going to have coming this year against kind of the COVID-19 budget headwind possibility?.

Okay. I'm going to turn that question over to Cliff Marks, who is also on the line, and he's the one literally day-to-day talking to customers. And I think he can give you a preview of how things are going right now and what the upfront looks like in terms of how our advertisers are looking at the industry as well as our platform..

Yes. Hey, Eric. I think that you're going to have a kind of bifurcated upfront this year. There will still be an upfront for the general marketplace as well as the cinema marketplace. I think a lot of brands and a lot of clients are trying to figure out where they're going to flow. But we project that there will be an upfront.

We have been very active in talking to clients and starting to present ideas. In traditional years, much more of our business happens in what we refer to as the broadcast upfront, the buying period in the late fall on October, November. And I'd project that, that will still be the majority of our upfront buying this year..

I think the one thing I would add to that is the fourth quarter from a theatrical point of view may end up being one of the biggest attendance box office fourth quarters in a really long time, as some additional major movies have shifted into that. So we're optimistic about our fourth quarter.

And hopeful that with theaters reopening in a really great fresh slate, that it will drive a lot of interest from advertisers..

So on that, you mentioned before, you're optimistic that a favorable environment for in-theater ads, given fresh content, possible delays in sports and scripted content.

How would you expect to see that reflected in the ad mix kind of versus traditional years in terms of upfront versus scatter? And then would you still think it's a ripe environment kind of for the platinum ad buys in that fall/winter period? Or could there be some hesitancy among buyers kind of lock those in at this point?.

Let me start, and then I'll let Cliff continue. I mean it's obviously a very fluid situation out there as the upfront, the traditional broadcast upfront is moving in a fluid dynamic, and there's going to be a mixture between really June through the fall of a mixture of scatter and upfront. And it's obviously an unprecedented time.

And I think as a result, there could be a mix that's different than historically has been between scatter and upfront. But every platform, including our own, is talking individually to our clients and to the agencies to come up with the right solutions from a timing point of view.

I think -- what, you want to add to that, Cliff?.

Yes. The other thing I would add is we've had a very, very loyal group of upfront partners who really like our medium. They've been loyal to the cinema medium. They've been loyal to NCM. And from all of the conversations we've had to date, most of our clients are not wigged out. They're very much -- they very much believe in our medium.

Most of them are working with us and have been very cooperative in trying to shift. So it's hard to know exactly, of course. But I anticipate that most of our upfront partners will return. And I can tell you that, I mean, obviously, it's early in the selling the post show advertising.

So we're still working on establishing the value and the premium value of that. So it remains to be seen, what happens with that. But nobody dislikes better inventory. Anyone we've talked to, nobody dislikes better inventory. So I don't foresee it to be challenging to big brands that they should be there.

We'll have to have a lot of conversations about the value, but that's what was going to happen anyways..

We have a question from Jim Goss at Barrington Research..

Continuing along the ad theme, to the extent that you have commitments right now that you obviously can't deliver, are you able to treat these effectively as make goods that you'll be able to deliver once theaters start to open and be able to maintain the revenue base you would have had, but deliver it later on? And what is the flexibility in delivery, such that you don't have to pile everything up into periods where the demand might be greater and then it really would hurt to have to give the ad spots away at a lower rate than you'd be able to get later on?.

Jim, let me start, and then I'll have Cliff add some more flavor to it. There's -- you're asking really two different questions. The first question is, is the existing commitments that had happened in the prior upfront, we're having a significant success rolling those into later months and later quarters.

So for example, commitments that were made in Q2 have been moved into Q3 and Q4. And we've had a very good success rate of maintaining those dollars. As it relates to the whole make good situation, we have an existing make good coming out of Q4 into Q1, which is about the same number.

Some of that make good will get used as theaters open, and the rest will get used as the rest of the calendar year goes forward.

Do you want to add anything to that, Cliff?.

Yes. No, I think that's accurate. I mean we've been able to shift a lot of our business, so that's a good thing. Depending on when we open and how many rating points are available, that will determine how much money we're able to burn before we write new money, before we write new deals.

So really, it's an unknown as to when do the theaters open and how many impressions we have. But we've done a really good job. Our team has really done a fantastic job of saving a lot of money..

Okay. And maybe competitively, you've talked about trying to take some share from broadcasting, which you've always attempted to do. Right now, broadcasters are having a pretty good success in-home viewership levels, but the ad man in pricing has been down because of a lot of the troubled advertisers and reductions in ad commitments.

And I'm wondering how that affects this whole process. And also, you might tie it into this shift in to national from local that seems to be continuing to take place in your....

Look, let me start. I think Jim, what I would say is that if you really look at current programming, there is so little on television today. Obviously, none of the sports is current. Most of what's on network television is reruns.

We believe that as we start going into this with all new programming beginning as early as July, that we'll have a real opportunity from a volume and CPM point of view to drive the business. When you think about it, a lot of these movies have been sitting there finished in the can for months now waiting.

So we think as people, particularly given how cooped up everybody is with the combination of that dynamic, plus really fresh programming and big programming that will open an opportunity to hopefully grow our business and steal share from traditional television and also to drive CPMs..

And the greater -- the macro marketplace, as you noted, that's really not a cinema issue. That's just a marketplace issue. There's a -- the broadcast networks, while they have increased viewership, there's not enough money to cover all those rating points. That's in every one situation. Every network is going to deal with that..

[Operator Instructions]. Gentlemen, there are no further questions at this time. I'd like to turn the call back over to Tom Lesinski for closing remarks..

Thank you, guys, for the questions.

I just want to close by saying our NCM leadership team, our Board of Directors and our employees remain deeply committed to position our company to weather this crisis and to come out the other end stronger than ever, so we can deliver on our mission to unite brands with the power of movies and engage movie fans anytime and anywhere.

Once the COVID-19 pandemic alleviates, we'll be well positioned to continue to deliver the growth strategy that we launched last year and that was beginning to take hold before the crisis hit.

While our stock price is currently depressed, our unique corporate structure is providing an investment vehicle that is continuing to deliver a substantial dividend return even during the crisis. We are confident that all the steps we've taken will allow us to deliver free cash flow growth and stock price appreciation once the crisis is passed.

I'd like to close by once again thanking all my NCM teammates, our cinema partners, lenders and the other business partners for their hard work and support through this period of time. I can assure you that all of us at NCM are working tirelessly to not only get through this crisis, but together, make NCM an even stronger company.

Thank you all for joining us, and I hope that someday soon, I'll see you all at the movies. Until then, I hope everyone stays safe and healthy. Thank you..

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