Greetings and welcome to the National CineMedia, Inc. Q2 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Ted..

Thank you, Laura and good afternoon everyone. I am 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 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. And now, I will turn the call over to Tom..

Impossible to name just a few. Movies are one of the ultimate forms of escape as we all know that, which is one of the reasons that cinema has historically done so well, during difficult or recessionary times, and we believe that will continue as we emerge from this pandemic.

Our NCM research team readily pulls our exclusive behind-the-scenes panel of movie super fans and those that have already returned to see a movie on the big screen and over 98% reported a positive experience.

For those in the areas of the country where theaters are yet to reopen, the desire to get back to the big screen continues to grow stronger, as people are tired of watching movies at home or are run out of streaming platform series to watch. 94% of respondents say they miss going to the movies to the theaters to watch movies.

Most importantly, going to the movies ranks number one as the top out-of-home activity, survey respondents are most looking forward to do once government restrictions are lifted.

Cinema has a long history of resilience and we remain confident that when theaters reopens, the studios start to release new films that audience levels will begin to build back towards normal levels over the next few quarters.

Of the moviegoers we surveyed, 75% plan to return to theaters either as soon as possible or within 1 to 3 months after theaters reopen, with another 21% planning to return after 4 months or more for a total of 96% of our core demo of movie lovers planning to go back to the cinemas soon.

There was also more recent news out of a study by UC Davis, which indicates that movie theaters may pose less COVID-19 risk than many other indoor venues as masks are being required and enhanced cleaning procedures are being performed by our theater partners.

Theaters are also expected to be safer, because people are not facing or talking to each other during a movie and social distancing can be maintained.

While there remain uncertainties related to the COVID-19 pandemic, we have positioned our company well and have good reason to be optimistic about NCM’s future as we have successfully balanced the two priorities of maintaining a strong liquidity position and a sales and operating plan that’s very focused on making sure that we hit the ground running on Labor Day weekend with the announced release of Tenet.

While not all of our clients will be back to spending at pre-COVID levels, we believe that our efforts to expand and diversify our client base, combined with the delay in sports and other TV scripted programming, will provide us with a strong client demand over the near to medium term. Finally, our Board of Directors has left the NCM, Inc.

dividend of $0.07 per share unchanged for the second quarter. It will be paid on August 31 to shareholders of record on August 17. This quarterly dividend will result in a current yield of over 11%, based on Friday’s closing price of $2.47. After the Q2 2020 dividend payment of $5.5 million, the NCM, Inc.

cash balance would allow us to pay dividends for approximately 3 years, regardless of any cash being distributed to NCM, Inc. Before I turn the call over to Ted, I would like to thank everyone on the NCM team for their commitment, support and hard work during this very difficult and unprecedented time.

None of what we have accomplished over the last several months would have been possible without the dedication and resilience of our NCM team.

I remain thankful for the strength and support of our executive leadership team, our theater circuit partners and I want to especially acknowledge how hard it has been for all the people that have been furloughed or that have taken significant pay cuts for now more than 4 months.

Although it has been a while, it has helped NCM to make it through this crisis and will be well positioned for the future I look forward to the coming weeks when they can get back to work to deliver on our mission to unite brands with the power of movies and engage movie fans anytime and anywhere.

So, thank you all and thank you, Ted for continuing to hold down the fort admirably, while we have temporarily delayed our CFO search until theaters begin to reopen and the business environment becomes more certain. I will now turn the call over to you to discuss our financial picture in more detail..

Thanks, Tom. As Tom mentioned, with theaters closed, we only recorded a small amount of digital revenue during the current quarter and so I will focus most of my comments on providing an update on our liquidity position and our monthly operating expense, along with capital expenditures and debt service obligations.

Then as always, we will open the call to your questions. The impact of COVID-19 on our second quarter and year-to-date results makes an analysis of our revenue and adjusted OIBDA not meaningful as it does not represent fairly our ongoing business.

Also, our 10-Q was filed this afternoon and we have provided a supplemental presentation of our Q2 and year-to-date results with comparison to prior periods on our website for your reference.

For the second quarter, our total revenue was $4 million compared to $110.2 million in Q2 of 2019 due to the temporary closure of almost all the theaters in our network in response to the COVID-19 pandemic. The revenue recognized in the second quarter of 2020 was primarily related to revenue associated with our digital service offerings.

That revenue included both sales by our digital group as well as our local sales personnel. In fact, our local sales team was able to convert $1.3 million of on-screen ad business to our digital platform in the quarter.

Due to the absence of any in-theater advertising revenue, total Q2 adjusted OIBDA was negative $12.7 million versus a positive $50.2 million in Q2 of 2019.

It is important to note that NCM LLC’s theater access fees, network affiliate payments, and platinum revenue share payments are driven by attendance, operating screens, and revenue, and therefore were not incurred while theaters were closed.

Additionally, through a disciplined and multifaceted approach, once all our initiatives were fully implemented in April, we reduced our core run rate operating expenses by over 50% to $4.7 million per month.

Combined with our debt service obligations and nominal capital expenditures, we are averaging a total cash burn rate of approximately $9 million to $9.5 million per month before the benefit of any revenue.

As Tom mentioned earlier, with the anticipated release of Tenet on September 3, over the next few weeks, we will begin a phased return of our teams from furlough which will allow us to have our network fully operational and generating revenue again.

We continue to be thoughtful to this phased approach so as to minimize the impact of expenses during this transition. For the 6 months of 2020, total revenue was $68.7 million versus $187.1 million for the first 6 months of 2019.

Adjusted OIBDA decreased to $1.7 million from $72.3 million in the first 6 months of 2019 and adjusted OIBDA margin decreased to 2.5% from 38.6% versus the first 6 months of 2019, again, all driven by the temporary theater closures in response to the COVID-19 pandemic.

It is important to note we had great momentum going early in Q1 as demonstrated by the fact that February year-to-date revenue was up 3% over the same period in 2019 before the theater closures began in late March. For the second quarter, we reported a GAAP diluted loss per share of $0.18 versus an earnings per diluted share of $0.11 in Q2 of 2019.

As adjusted to exclude the impairment of long-lived assets and CEO transition cost, GAAP diluted loss per share would have decreased to $0.17 per diluted share in the second quarter of 2020, while earnings per diluted share for Q2 of 2019 would have remained the same.

For the 6 months of 2020, we reported a GAAP diluted loss per share of $0.22 compared to an earnings per diluted share of $0.10 for the first 6 months of 2019. For the first 6 months of 2020, capital expenditures were $5.5 million versus $6.9 million spent in 2019 due to the halt of non-essential capital spending.

We now expect total capital expenditures to approximate $11 million in 2020. It is important to note we continue to invest in our sales planning and inventory management platform that is in its testing phase.

While we have been very focused on preserving cash while the theaters are closed, this inventory management tool is a critical part of our plan to improve our in-theater advertising product and we expect to launch this system in Q1 of 2021 as originally planned.

Once launched, there will be immediate cost savings and other operating efficiencies that over time will more than offset the capital currently being invested.

In the second quarter and for the first 6 months of 2020, we recorded $0 and $1.4 million respectively of integration and other encumbered theater payments, primarily from AMC Carmike theaters versus $5.7 million and $8.1 million respectively last year.

Because the encumbered theaters were temporarily closed during the second quarter 2020, no advertising cash flows could have been generated if the theaters were within NCM LLC’s network and thus no integration payments were earned during the 3 months ended June 25, 2020.

As a reminder, these integration and other encumbered theater payments are added to adjusted 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.

Moving on to our balance sheet, our total debt outstanding at NCM LLC at the end of Q2 2020 was $1.1 billion versus $925 million at the end of Q2 of 2019, due primarily to the increase in our revolver balance that was fully drawn in late March when the theaters began to close.

Our revolver balance at the end of the second quarter in 2020 was $167 million compared to $27 million at the end of Q2 2019.

Our average interest rate on all debt was approximately 4.9% at the end of Q2 compared to 5.8% in Q2 of 2019, including our $265 million floating rate term loan bank debt and revolving credit facility that had a rate of approximately 3.6%. Excluding revolver balances, 70% of our total debt outstanding at the end of Q2 2020 had a fixed interest rate.

As mentioned on our Q1 earnings call, in anticipation of the impact of the pandemic and related theater closures, on our trailing four-quarter covenant calculations, we obtained a senior bank facility waiver from our NCM LLC net senior secured and total bank debt leverage covenants through the quarter ended July 1, 2021.

The NCM LLC bank debt covenant waiver included a new requirement to maintain a minimum liquidity of $55 million, including cash and availability under our revolver. Also, NCM LLC will have new limitations on its ability during the waiver period to distribute to founding member theater circuits or NCM, Inc.

any of its available cash, as defined in the LLC operating agreement. Looking at our leverage, total net leverage at NCM LLC as of the end of Q2 2020 was approximately 6x trailing four-quarter adjusted OIBDA versus 4.2x in Q2 of ‘19 and a covenant of 6.25x.

Our consolidated net senior secured leverage ratio was 4.6x versus 3.1x in the comparable period 2019 and a covenant of 4.5x. As Tom mentioned, we entered the COVID-19 crisis with a strong liquidity position and we have maintained that strong position today.

At the end of Q2, NCM LLC had a cash balance of $168.1 million and an accounts receivable balance of $25.3 million. NCM, Inc. had a cash and investment balance of $82 million. Subsequent to the end of the second quarter, we paid 90% of our annual tax receivable obligation to our founding members, leaving NCM, Inc.

with a current cash balance of $68.5 million. NCM LLC began the second quarter with a cash balance of $132.2 million and ended the second quarter with a cash balance of $168.1 million as we collected $90 million or 82% of our pre-COVID-19 accounts receivable balance.

In summary, at the end of the second quarter, NCM LLC, with $168.1 million of cash on hand, plus $25.3 million in accounts receivable, could fund its average monthly operating expense, nominal capital expenditures and debt service obligations totaling $9 million to $9.5 million for over 18 months.

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

As Tom mentioned, we announced today that our Board of Directors has authorized NCM, Inc.’s regular quarterly cash dividend of $0.07 per share of common stock. The dividend will be paid on August 31, 2020 to stockholders of record on August 17, 2020.

At this dividend level with $68.5 million of cash and short-term investments at NCM Inc., we currently have enough cash available to cover 3 years of dividends at NCMI with no other cash distributions being received from NCM LLC.

You should note that the recent bank waiver I mentioned earlier currently prohibits distributions to its members, including NCM, Inc. and the new limitations remain through the quarter ended July 1, 2021, unless certain financial conditions are met.

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 nearly 3 years of dividend cushion is considerably longer than what we have historically targeted.

We will continue to monitor this dividend cushion level as theaters reopen and we get a better read on what the level of the theater attendance and in-theater advertising revenue will be. As mentioned, for the remainder of 2020, our revenue will be primarily dependent on how many theater attendees and related advertising impressions we can deliver.

Therefore, as always, the declaration, payment, timing, and amount of future dividends payable will be at the sole discretion of the Board of Directors, who will consider general economic and advertising market conditions, the company’s financial condition, available cash, current and anticipated cash needs, and any other factors that the Board of Directors considers relevant.

This includes short-term and long-term impacts to the company related to COVID-19 pandemic and restrictions under the NCM LLC credit agreement.

Finally, consistent with our comments during our Q1 earnings call, we still do not have enough future visibility about the timing of all film releases, related theater openings, and network attendance to provide a reliable future revenue and adjusted OIBDA guidance.

We will only begin providing guidance when we have access to more reliable information regarding these key market data points. This concludes our prepared remarks and we’ll now open the line for questions.

Operator?.

[Operator Instructions] The first question comes from the line of Eric Wold with B. Riley. You may proceed with your question..

Thank you. Good afternoon, guys. A couple of questions. I guess, one, you talked about continuing to maintain and build up a healthy pipeline of ad commitments, while theaters remain closed along with kind of shifting those commitments from prior periods into kind of the upcoming periods.

How do you expect that to be handled under an environment of limited impressions when the theaters begin to reopen in terms of how those dollars are allocated between what’s going to be a diminished amount of impressions?.

Well, it’s going to come down to who has commitments and who wants to use them regarding any period in time. Remember, flights have to line up ultimately to when a brand or an agency wants to use the inventory, so the first thing you got to do is marry up timing because not everybody wants to run the minute Tenet starts.

Some people do, some people will want to wait. So, the first thing we have to do is look at it from a timing point of view.

And then, we will allocate it in the most fair way we possibly can across all of our clients and obviously, we are going to start doing that now that we know the Tenet is what appears to be firm, we are in the process of doing that and Cliff and his team in the sales planning team are all working furiously on getting that balanced and worked out and that’s going to be an ongoing process, week-to-week and month-to-months really for the rest of the year..

Okay.

And how does that work kind of with new advertiser coming in? Obviously, someone wants to advertise, let’s say, in January and February of next year, are they kind of – if they come in now, are they kind of back of the line in terms of to kind of go back through everyone else, whose kind of in the commitment pool and see if they want to go there first before you kind of open to new people coming in or is that not the way it works?.

Cliff, do you want to answer that question?.

Yes, sure. So, we will be actively participating in the upfront, which a lot of people place calendar money for January through December of ‘21.

And we have a gauge, our planning group has a gauge of what our current obligation is for people who have committed to us and we will have a pretty good estimate based on what we think attendance will be based on how much new money we can take in. So, it’s a little bit – it’s a little bit of juggling, but – and everyone understands it.

We are going to be transparent and share all the data with them and we will do the best we can to maximize every dollar..

Clearly, it doesn’t sound like that’s impacting the ability to get new people to commit dollars. Even with that increased competition, they are willing to kind of get in the pool, so to speak..

That’s right, that’s right.

I think – I would like to really shout out the relationship that Cliff and our senior ad sales guys have had with the ad community in many cases for 20 years to 30 years and it’s at times like this, where there is still some uncertainty, but also a lot of potential that the relationships that he and Scott and the other key senior people have built, it gives us – puts us in a really good position compared to other media companies that may not have the same experience level that we have.

So, the relationships matter and in this particular case, you will see the benefits of it for NCM..

Okay.

And final question from me, with the – with kind of the big pool of committed ad dollars out there and obviously, competition for the impression, how should we think about CPMs and margins, given what I think would be – I may be wrong, an inability kind of squeezed scatter ads into the mix, given the level commitments already there?.

It would be really difficult to give you an honest answer, but I will try to give you a forecast. Having actually not been in the market with new inventory for four months, it’s a little difficult to forecast what CPMs are going to be.

What I will say is that the industry going into Q4, not just the cinema advertising industry, but the media industry overall, is expected to have lower budgets and lower CPMs. I think if you are going to be flat, you are going to be happy. I think across the board most CPMs are going to be down, at least, for the next probably quarter or two.

Hard to say what’s going to happen for the rest of 2021, but – I don’t know if you want to add anything to that, Cliff, based on your end market sort of experience lately..

Yes, the one thing I would add is, a lot of the business for fourth quarter is already pre-negotiated. So, CPMs are established. So, really your question is more relevant for ‘21 than it is for fourth quarter..

Okay. [Operator Instructions] Our next question comes from the line of Anthony DeRosa with [indiscernible]. You may proceed with your question..

Hey guys. Thanks for taking my call. I just had a real quick question here.

Since the theater is down and your theater experiences are nil, what’s the additional revenue resources you guys have been tapping into on the online OTT markets?.

I am going to let Cliff answer that first, but let me start by saying we have been building a digital business for over 3 years now. And ironically, the only form of revenue we created on the digital side or – our company created was monetizing both our own and owned assets as well as selling them to third parties.

So, Cliff, you can give a little more color on the digital revenue and where that’s coming from and the benefit to our company..

Yes, the majority of the digital revenue came to our local sales team who were able to work with their clients to shift money that was committed to us on screen. With some of our digital product that could be mobile, we also sell over-the-top impressions for third parties.

Our local team did a fantastic job of converting revenue and that’s what a 100% of that revenue that Tom talked about is..

Yes. Well, one last thing to tap off from that.

Now that most of the major studios are pushing toward the OTT for releases, are you guys looking at maybe possibly doing some synergistic work with like Netflix, Prime, or [indiscernible] or any of these other streaming networks that are growing by the month?.

Yes. Streaming is probably our most important, if not our biggest category and we expect – and I even mentioned this, two quarters ago, we expect the biggest growth we have is going to come from the streaming players. They love the fact that they can reach millennial and Gen Z moviegoers in a very efficient way.

Historically, people like Amazon and Hulu and others have always come to our platform. So, we expect as those industries continue to invest in marketing, that we will benefit more so than even our market share from those types of advertisers..

Great. Thank you, guys. I will be watching and following you guys. Thank you..

Alrighty..

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn this call back over to Mr. Tom Lesinski for closing remarks..

Okay, thank you. Our NCM leadership team, our Board of Directors and our employees remain deeply committed to position our Company to weather this crisis and come out of this pandemic stronger than ever.

As of today, our three founding members, the largest theater circuits in the US, AMC, Cinemark, and Regal are planning to reopen their doors and welcome audiences back to the movies beginning later this month.

Once that happens and attendance levels begin to reach, and we believe that we are well positioned to deliver on the pillars of our growth strategy that we launched last year that included record Q4 2019 ad revenue and also generated free cash flow growth, stock price and dividend appreciation for our shareholders that existed prior to the start of the COVID crisis.

I would like to close by once again thanking all of my NCM teammates, our Board of Directors, our cinema partners, lenders, and other business partners for their support through this difficult time.

Film has always been a unique way of sharing stories of humanity, love, justice, and change that help bring people together and I look forward to the day soon when we can all get back together and go to the movies again. Thank you for joining us on our call and I hope everyone continues to stay safe and healthy. Thank you..

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation. Have a great day..