Greetings and welcome to the National CineMedia, Inc., Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Ted Watson, Senior Vice President of Finance. Thank you, sir. You may begin..

All right. Thank you, Victor. Good afternoon, everyone. I am joined today by our CEO, Tom Lesinski and 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 and 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 our Investor Relations page of our website at ncm.com. Now, I'll turn the call over to Tom..

End Game in 2019. Until the theater audiences return, we've continued to aggressively focus on maintaining a high level of liquidity.

The cost reduction measures that we've instituted plus our current cash balances including the new $50 million debt facility will ensure that we have sufficient liquidity to operate our business for the next 12 to 13 month without considering the benefit of any revenue beyond the rollout of the vaccine and return of positive cash flow.

As discussed on previous calls, beginning in March 2020, we took significance steps to cut costs and reduce operating capital expenses.

Than in November 2020, as the pandemic persisted and there were additional delays in movie releases, we took additional steps to reduce costs including re-implementing a combination of temporary furloughs, permanent layoffs and further salary reductions.

In early January of 2021 with the COVID-19 surge following the holidays, we reinstated up to 50% salary reductions for almost all employees and implemented additional temporary furloughs and further salary reductions. To date over a third of our headcount has been permanently eliminated or on furlough since the start of the pandemic.

Over 20% of our current headcount is on reduced work schedules of 50 to 60 and almost all remaining employees are salary reductions up to 20%. These cumulative measures reduced our actual total Q2 to Q3 2021 run rate cost by 50% versus the same period in 2019 and by 52% versus our pre-COVID run rate.

As we continue to evaluate the short and medium term needs of our business, we've been very focused on also ensuring that we do not permanently impair our business including make sure that we retain a high quality team so that we are ready to quickly return to a normal operating level, when theater are just returned.

We've also continued to strategically make capital investments, most notably in our new cinema advertising management system that was launched last month. This new inventory management system will provide a more efficient, seamless sales process, which will allow us to better compete with other video and digital ad platforms.

This new streamline end-to-end process is ready to result in significant cost, revenue and another efficiencies for NCM, including more efficient pricing and inventory placement, resulting in reduced make an obligations and expansion of our client base.

Our new system also laid the foundation to develop a solution to sell our theater inventory programmatically as we do know with our digital inventory, creating additional monetization opportunities in the future.

We've continued to expand our cinema advertising network with the recent announcement of a new long-term network affiliate agreement with Harkins Theater Circuit. Harkins is one of the premier movie exhibitors in the Western US and the fifth-largest exhibitor in America.

With the addition of Harkins theaters in May of this year NCM’s national theater network will include all the top five exhibitors in the country.

Our Noovie preshow entertainment program will now be seen by millions of additional movie fans across the Southwest and over 500 Harkins screens in 33 premier theater locations in Arizona, California, Colorado and Oklahoma.

Harkins' industry-leading and growing attendance per screen in addition to its state-of-the-art theaters in key markets enhances our already strong national media network and will particularly bolster our coverage in Phoenix and number 11 DMA.

Harkins joined NCM's network at an optimistic time to both the movie and advertising industry, the 2021 film fade is stacking up for big summer fall and holiday movie season following the COVID-19 vaccine rollout.

Meanwhile as mentioned earlier, younger audiences are coming -- are continuing to abandon add supported television and audience are always eager to go up the couch and get back up to the movies. For brands seeking to reach the highly sought-after 18 to 49 and 18 to 34-year-old audience demographic, cinema is an attractive TV GRP replacement.

During the pandemic, we've also made significant progress in our strategy to diversify our media inventory in ways that are complementary to our core cinema business and strengthen our unique bundle of on screen and digital advertising products.

In October of 2020, we launched our new national CineMedia digital auto home group which was created to unite grants with the power movies by extending moviecentric entertainment content trivia and advertising beyond theaters to a variety of complementary article venues.

Our unique bundle of out of home advertising products will be sold by our existing high quality salesforce creating many selling and operating cost benefits.

Our initial partners that we've recently announced include some of the top out of home networks in the space, including Captivate, a leading location based digital video network for screens and premier office for most network properties.

Coinstar with the new ad planet screens that sit at top Coinstar kiosk and grocery stores and Ziosk, the industry-leading technology platform for guest entertainment and engagement in restaurants and we're also planning to pursue partnerships with other networks in retail locations nationwide.

This new high quality out-of-home and inventory gives us over 1 billion additional impression available for existing sales force to sell monthly and allows us to package the strength and effectiveness of cinema, digital and it's new out-of-home venues together to create innovative integrated campaigns for brands that engage movie fans beyond the big screen.

All these new out-of-home relationships also provide us access to additional first and second party consumer data that will enhance the newly 171 million data sets in our current consumer database. This consumer data is critical currency in today's highly competitive media environment that we can utilize cost for all of our advertising platforms.

Audience data drives ad revenue and increases our ability to deliver the kind of targeting and attribution that our clients demand.

The fact that we've been able to continue to generate revenue from our digital business and deliver movie audiences to our brand partners across other complementary mediums while theaters have been closed is directly due to our ability to leverage our unique first and second party data.

This continued growth in our consumer database is combined with the capabilities of our recently launched new inventory management system to position us well to provide marketers with an even stronger, unique bundle of advertising products.

During the COVID-19 pandemic, our sales teams have been tirelessly working to keep cinema and NCM top of mind in the marketplace. Our local sales team has also done a great job shifting in-theater advertising commitments to our digital platforms as reflected by our Q4 digital business growing 24% over Q4 2019.

As a result of all this hard work, media buyers remain enthusiastic about the cinema that will include great -- many great upcoming films and the unique advertising opportunities that we have to offer that have become even stronger since the pandemic began.

I'm very proud of the job that our entire NCM team continues to do under very difficult circumstances. I'd like to thank them and our board and our distributor partners again sincerely for their continued support as we navigate this historic and turbulent time together.

Finally because of the pandemic continuing into Spring '21 and the extension of our bank amendment waiver to Q3 of '22, our Board of Directors has trimmed the NCM Q4 dividend slightly from $0.07 to $0.05 per share.

This will allow adequate question for funding the dividend while available cash distributions from NCM LLC is restricted during the bank amendment period. The dividend will be paid on April 05, 2021 to stockholders of record on March 22 of '21.

This quarterly dividend will result in a current yield of 4.2% based on Friday's closing share price of $4.75. Before the Q4 2020 dividend payment of $3.9 million, the NCM Inc. cash balance of $57.9 million that allows to pay dividends well beyond our business recovery period regardless of any cash being distributed to NCM Inc. commenced in LLC.

While uncertainties related to the COVID-19 pandemic remain, we believe that we have positioned our company well and have good reason to be confident about our NCM's future as we continue to effectively balance the two priorities of maintaining strong liquidity and executing on sales and operating plan focused on bringing the unparalleled marketing power of the movies to even more brands and finding new ways to engage movie fans anywhere and everywhere.

I'll now turn the call back over to Ted to discuss our financial picture in more detail..

All right, thanks Tom. As Tom mentioned, despite the impact of COVID-19, we've made significant progress over the last year to bolster our liquidity position while actively growing our network and diversifying our lines of business.

With up to 60% of our network theaters closed during the fourth quarter and over 50% still closed, we recorded $15.7 million of Q4 revenue an increase of 162% over Q3.

Obviously the impact of the COVID-19 pandemic on our business makes an analysis of our revenue and adjusted OEBITDA versus prior periods not meaningful as the current results do not purely represent our ongoing business.

Therefore, I will focus most of my comments today our current improved liquidity position and our success in limiting our monthly cash flow burn rate while minimizing the impact of the longer term prospects of our business.

Due to our efforts to reduce our operating expenses, total Q4 adjusted OEBITDA was negative $9.9 million, a 12% and 22% improvement over the $11.2 million and $12.7 million negative adjusted OEBITDA recorded in Q3 and Q2 respectively.

The combination of our highly variable operating cost structure and our proactive overhead cost reductions allowed us to limited our adjusted OEBITDA losses during a period where our Q4 network attendance was down 92% compared to the same period in 2019.

Our Q4 average burn rate was reduced to approximately $11 million per month versus $12 million and $13 million in Q3 and Q2 respectively. The majority of our operating cost reductions have related to personnel. During Q4 over 40% of our employee base were furloughed, eliminated or had salary reductions of up to 50%.

The remaining employees have their salaries reduced by up to 20%. These additional cost reduction measures reduced our core operating expense in Q4 to $5.2 million per month compared to our pre-COVID run rate of $9.5 million per month or a savings of 45%.

As we've discussed in the past, due to our high growth operating margins as revenue levels build, we will achieve operating cash flow breakeven after debt service when our quarterly revenue reaches approximately 50% of 2019 levels.

Our total 2020 revenue was $90.4 million versus $444.8 million for 2019, had a strong start to the year was completely derailed by the spread of the COVID-19 pandemic to the US in mid-March.

Adjusted OEBITDA decreased to a negative $19.4 million from $207.5 million in 2019, again all driven primarily by the temporary theater closures in response to the COVID-19 pandemic.

For the fourth quarter we reported a GAAP loss per diluted share of $0.45 versus an earnings per diluted share of $0.24 in Q4 of 2019 and for 2020 we reported a GAAP loss per diluted share of $0.84 compared to earnings per diluted share of $0.46 in 2019.

Both earnings decreases were again the result of a significant network attendance decline resulting from the COVID-19 pandemic. For 2020 capital expenditures were $11.2 million versus $15.3 million spent in 2019 due to a halt of all nonessential capital spending.

A significant part of our capital spend was related to finishing the investment in our cinema advertising management system that Tom previously mentioned.

Completing this investment in this inventory management system will result in immediate expense savings and incremental revenue opportunities as it will allow for more efficient use and pricing of our inventory and making buying of our network easier for media buyers especially during high demand periods.

In fact the implementation of this new system is expected to reduce personnel expenses and other operating overhead by approximately $8 million per year from the historical run rate of a couple of years ago and $1.2 million per year from our 2021 run rate that already reflect staffing reductions we have undertaken over the last 18 months.

In the fourth quarter and for fiscal year 2020, we recorded $0 and $1.4 million respectively of integration and other encumbered theater payments primarily from AMC Carmike theaters versus $8.6 million and $22.3 million respectively last year.

The AMC integration payments are based on what NCM could have earned had those theaters been sold as part of our network.

As a reminder these integration and other encumbered theater payments are added to adjusted OEBITDA for debt in compliance and partnership, cash distribution purposes that are not included in reported revenue and adjusted OEBITDA as they are recorded as a reduction to the net intangible assets on the balance sheet.

Moving to our balance sheet, our total debt net of cash at NCM LLC at the end of 2020 only increased by $13 million to $928 million versus $915 million at the end of 2019.

Our average interest rate on old debt was approximately 5% at the end of 2020 compared to 5.5% at the end of 2019 including our $263 million floating rate term loan bank debt and revolving credit facility that had a rate of approximately 3.7%. Excluding revolver balances, 70% of our total debt outstanding at the end of 2020 had a fixed interest rate.

As Tom mentioned earlier, we just completed an amendment to our senior secured credit agreement providing an extension to the waiver of the financial leverage covenants through Q2 of 2022 with an additional step down to 6.75 times for the total leverage ratio and 5.5 times for the senior secured leverage ratio in Q3 of '22 before a full compliance must resume for the full year of 2022.

This NCM LLC bank debt amendment will continue to include the requirement to maintain a minimum liquidity of $55 million including cash and availability under our revolver. NCM LLC will also not be permitted to distribute available cash during the amendment period to its founding member circuit owners or NCM Inc.

Therefore, the company must be in compliance with this credit agreement and net senior secured leverage ratio must be less than four times and a revolver balance must be less than its pre-COVID, COVID average outstanding balance of $39 million before available cash distributions to the NCM LLC owners can resume.

As part of the amendment terms to obtain the waiver, the company has also agreed to an increase in its existing TLB debt and revolving credit facility pricing grids. In conjunction with the existing bank debt facility amendment, we've also entered into a new $50 million senior secured term Loan B tranche.

This new debt facility will mature in December of 2024 with pricing of LIBOR plus 800 basis points with a 1% amortization per year. This additional funding provides us with the additional liquidity to execute our strategic growth plan as we emerged from the COVID-19 pandemic.

NCM LLCs current cash balance including the new term loan B proceeds is $147 million plus $6 million in accounts receivable.

Assuming an average of $11.5 million to $12 million per month cash burn rate including the impact of our new amendment in debt facility, we have a liquidity runway of 12 to 13 months before the consideration of the bank debt liquidity minimum financial covenant.

With our high operating cash flow margins and revenue expected the build into the back half of 2021, we believe that this 12 month to 13 month zero revenue liquidity runway is actually longer. Also as mentioned, we need revenue to equal approximately 50% of 2019 to breakeven on a cash basis after debt service.

As Tom mentioned, our Board of Directors has authorized NCM Inc.'s quarterly cash dividend at $0.05 per share of common stock. Given the current NCM cash balance of $58 million our current $0.05 dividend can be paid for the next three years with no additional NCM LLC distribution to NCM Inc.

The company intends to pay a regular quarterly dividend for the foreseeable future at the discretion of the Board of Directors. The nearly three years of dividend cushion is considerably longer than we have historically targeted.

We will continue to monitor this cushion and related dividend levels consistent with the company's intention to distribute over time substantially all its free cash flow.

Our Board of Directors will continue to evaluate the future dividend levels as our network attendance levels trend back towards historical levels and we get a better read on advertising revenue growth.

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 consider is relevant.

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

Finally, consistent with our comments over the last quarters, we do not have enough visibility into the timing of film releases, related theater openings and network attendance to provide a reliable future and adjusted OEBITDA guidance.

We will only begin providing revenue and adjusted OEBITDA 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 up the lines for questions.

Operator?.

[Operator instructions] Our first question comes from Eric Wold with B Riley Securities. Please proceed with your question..

Just couple of questions, I guess one you incent to kind of what you're even seeing with the advertising pipeline in recent weeks, New York was announced open vaccine distribution stabilizing, what in recent weeks versus what you saw in Q4 in terms of the trend and then turning to your sense of the level of upfront commitments still in that pipeline as the films are to be shown, versus what you will be leading on the scatter demand?.

I'll answer the first question and I'll the second one over to Ted, what's interesting in our company is every week we have the entire sales team on phone calls and I always listen into those calls and in the past two to three weeks given the positive news on vaccinations and theater openings in major markets, the amount of volume and the amount of activity associated with what's happening in that space has significantly increased and I was really pleased to hear that after a relatively long period of time where many of our biggest advertisers were sitting on the sidelines.

So I was highly encouraged by the amount of activity in the quality of the RFPs and negotiations and discussions happening with advertisers.

So they see the light at the end of the tunnel as do we and part of that's really a testament to the fact that we've kept our sales people engaged with our biggest agencies and clients for the last year to make sure that cinema advertising was really forefront and always something that is part of the media mix.

As relates to where we are upfront, Ted do you want comment on that in terms of pipeline?.

Yeah Eric, we're not giving any specific guidance on the pipeline at this juncture. What I will tell you is that it's clearly second half of the year pipeline that's really what we're talking to folks and looking at commitments. So I would say that historically the upfront is call it 65% of revenue and scatters the other 35%.

Obviously I think very well it probably be flipped to some degree this year, higher scatter revenue, but there is a solid pipeline in the back half of the year and specifically into Q4 is what I would say..

And then just my final question on the digital out-of-home opportunity. You clearly got into this for longer term opportunity to hand.

Any way you can give a sense of your goals, your revenue goals under that segment over the coming years, how that margin profile, I know that you’ve been leveraging your existing sales force out of margin profile will look compared to the existing business and how much of an overlap is that between the advertiser and customer base of DOH versus in the theater.

Is it a lapse as you can put together stronger campaign to combine all of that or is there enough differential now your TAM has improved in terms of new areas?.

We guess a lot of questions so let me try to -- so it's okay, I'll try to remember them all, if I don’t, feel free to remind me. We started looking at diversifying our company's revenue streams long before COVID happened.

It was part of our whole long-term planning process and the goal was always to try to find other digital out of home opportunities that correlate to the young demo that is so coveted in theaters. So when we looked at things, we looked at demo match and we also looked importantly at scale. We wanted to make sure that things were large.

It's not much of a stretch to talk about restaurant goers and moviegoers, the dinner and movie concept has been part and parcel of American culture for a long time. So that was a natural one. In terms of giving you a sense of the size of it and where we hope to be, we're not really giving any guidance on that yet.

What I will tell you though is we do expect this business to be meaningful in '22 and we believe this next six to seven months will be laying the foundation for that.

The initial response we've gotten from advertisers as part of the dynamic of cinema and this is really positive and people get it and they get the correlation to it and I wouldn't want to understate the data piece of this, as all of these out-of-home initiatives involved a significant amount of additional data.

There are opportunities for us to continue to core our out-of-home business beyond what we've announced. There is a major additional retail group that we'll be announcing in the next couple weeks. So this is something that's going to keep growing and we look at is as a real opportunity for our company..

Thank you. Our next comes from Eric Handler with MKM Partners. Please proceed with your question..

Just wanted to follow-up on Eric's question when you look at this, digital out of home business, are you already selling, are you up and running this business, so we'll actually maybe start seeing a little bit of revenue circuit start trickling in right now? Are there any incremental costs associated with this business, so just kind of think a little bit deeper into this business..

So the revenue will start trickling in. We've literally started positioning the product in the marketplace in the last month or so. We've hired head of that group. We're committed to having the right staffing for that group in addition to utilizing our substantial local sales force.

I would look at the next six months as really building it out, but there will be some revenue this year and we're excited about it.

Cinema will always be the most important thing to National CineMedia but it seems obvious with the infrastructure that we have and with the sales organization that we have and with our new digital systems that we've implanted, we can really optimize our overhead pursuing some of these alternatives.

Anyway we’re a very invigorated sales team around right now and we're excited about marrying all these digital out of home opportunities with cinema and we do believe that one plus one is going to equal more than two in many cases like this. Was there a second part to your question? I want to make sure I answered it..

I have another question, with regards to adding another $50 million of liquidity in the fourth quarter, you already had a good amount of liquidity already.

Is there any particular reason why you felt there was a need to draw down further and as you're thinking about the timing of that?.

Yeah I'll take that. You're right Eric, we did preserve and we had a fair amount of liquidity, but the answer to your question is at the end of the day, it's to ensure that we get through the other side and really the main issue from our business is the working capital lag.

So while we had plenty of cash, we do have to maintain a minimum liquidity of $55 million and so you think about the business ramping back up and as we start generating sales, our typical kind of days, sales outstanding is like 90 to 100 days.

So we will have a little bit of a lag collecting that revenue from when it's recognized and that's really the primary reason for doing this..

The other thing I would add that answer just is that having that additional liquidity will keep us our ability to be aggressive on the digital out-of-home side as well as any acquisitions they may come up on the affiliate exhibition side. So those are other additional rationales for what we might do with that additional liquidity..

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

Hey Tom, thanks for taking my questions. I appreciate it. I guess the first question is just on the reserve [ph] obviously that was a trend going into I guess the pre-pandemic and accelerated obviously now just trying to operate without so much personnel.

What are you seeing I guess in the auditoriums in terms of attendance behavior what's reserve 100% maybe at some are taking some of your affiliates and finding numbers?.

It's really hard to draw conclusions in this particular time period just because of the odd restricted seating situation, the restricted number of screenings and most important a very limited release schedule in terms of what's out there.

What I can say is without being too specific is in many of the key markets particularly in major states like Texas where there a lot of theaters open, the actual attendance levels and the consumer satisfaction is very high and encouraging and higher than we would have even thought, but I would be hesitant to extrapolate one market out to the rest.

We know preliminarily that with the announcement in New York that there's been a lot of evidence about those kinds of restricted theaters already selling out, but I think we really need a couple of months of theater openings on a national scale and real movies to draw conclusions.

I think from any conclusions from what happened during the pandemic would be really premature. Obviously we're keeping an everything happening, but I look at this as a very fall sensor reality in terms of the behavior particularly from a product point of view as you've seen in the way some of the movies have released..

Is there -- do you sense any push back from movie stations, the duration of the show time, is there some I guess nervousness of the duration there waiting for the movie to start..

We track this very heavily in our consumer studies and we haven't seen any negativities on that so far. Obviously, some of that we keep track of, candidly with the pandemic and with the processing of getting people through people have arrived generally earlier and they normally do, which is a good thing for us obviously.

So it's really we're going to keep an eye on over the course of the next several quarters though..

How do you think about your overall screen network size Tom kind of, do you enforce this sort of the belief that may be overall we'll see a reduction in the screening from the US. Flipside of that is, it seems that the one big deal if you're talking on the affiliate side.

So how you balance those two when you think about your total screening size over the next 12 to 18 months and thoughts on how screening is behaving and so what are the duopoly market between your NIM?.

So the way we look at it is there's always room to grow our network. We believe especially not knowing what the consumer behavior is going to be like as it relates to post-COVID or as it relates to less theaters being opened that will continue to be aggressive in bringing new affiliates on board.

Obviously we're very happy with the Harkins announcement and what that brings to our family, but as I've mentioned on multiple calls, we believe there's a real rationale to want to be part of the largest theater network and there is a real benefit to it for exhibitors.

So you know not knowing what the screen count will be like or how many theaters may close over the next year or two, we look at our position of the marketplace as something that's attracted to distributors. So we'll continue to add affiliates as they become available.

In terms of commenting on what our competitors are doing is I don't think it's something that we're prepared to do at this time..

Last question for me and I appreciate this is you mentioned the sales and models and this is now challenging environment and too severe compensation is commenced on variable. So just wondering how your sales team overall has held up.

How much turnover you had if any and if there is sort of a time even after rebuild because you see or not?.

I can bring Cliff on as a guest responded to this. Cliff are you there.

Let me just phrase it by saying that due to Cliff's leadership which has been steady and significant, the loyalty that he has created not just with our sales team, but with our clients is really exceptional and the credit goes to him for where we are today, but also how we've weathered the storm.

So in terms of any kind of significant attrition, I can tell you that we haven't lost a senior salesperson in the past year. Obviously there has been attrition at lower levels, but I'll let Cliff answer more specifically..

We've done a really good job at forming our team what's going on, keeping them in the loop and just ask them to have faith in the medium and the company and for the most part, we've maintain most of our people as Tom eluded to, yeah we've lost some lower level people, but I felt really good about the team we've put out on the field in just a month from now or whenever the movies open up and we're going to be ready to lock and we're going to be very competitive..

There are no further questions at this time. I'd like to turn the floor back over to management for any closing remarks you may have..

Okay. As I mentioned previously, we're very well positioned for the future as we leave 2020 behind and focus on the road ahead and we're looking forward to the return of theater audiences as the COVID vaccine rollout accelerates and herd immunity takes hold.

All of our research indicates strong consumer demand, see films on the big screen once again and with all the 2020 films delayed, many of them into '21, the film average is very strong in the upcoming years.

So despite the challenges of 2020 and the hard work of our team to expand our network and begin to diversify our advertising impressions basically, we're very optimistic about capturing additional video advertising market share as TV GRPs continue to decline, which makes our young audience even more attractive to media buyers.

I want to particularly thank our senior management team and our entire staff once again for all their hard work during these very difficult times and I want to thank our shareholders and lenders particularly for their support and patience.

So we appreciate all of you joining the call and I hope that everyone continues to stay safe and healthy and look forward to seeing you very soon again at the movies, thank you..

Ladies and gentlemen, this concludes today's webcast and you many now disconnect your lines at this time. Thank you for your participation and have a great day..