Good day, and welcome to the National CineMedia, Inc. Q2 2022 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Dan Dorenkamp, Director of Finance. Please, go ahead, sir..

Good afternoon. I'm joined today by our CEO, Tom Lesinski; and our CFO, Ronnie Ng. 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. Now, I'll turn the call over to Tom..

The Rise of Gru. Elvis also broadening an older audience demo that usually only frequently critically claim films in the Rouse with 31% over age 55 and 48% hold for age 45. All of these data points have provided us with strong selling tools in the end marketplace.

We are benefiting from the recent resurgence of other out-of-home marketing platforms markets have begun to allocate more of their budgets to that sector to further differentiate their brands in an increasingly clouded media marketplace.

This shift also appears to reflect the continued decline in TV ratings and declining effectiveness of social and other digital platforms due to increasing government regulation and new user privacy production software available on Apple and other devices.

As out-of-home ad platforms continue to strengthen their data and other digital capabilities, we expect this current trend to continue.

As you can tell me very excited about our future prospects, with theater tenants trending back towards pre-pandemic levels, the value of NCM's network with its broad reach, coveted young, diverse audience and ability to target consumers before during and after the cinema experience is once again being sought by advertisers.

In fact, with the strengthening of our movie over databases and ROI measurement tools, the value of our integrated media offering for marketers has never been greater.

While we still work do we still have work to do to rebuild our revenue and cash flow base and right-size our debt structure, I'm confident the building blocks are in place for our recovery.

With that, I will now pass the call up to Ronnie, to update you on the recent financial performance and provide some comments about our future outlook, Ronnie?.

Thank you, Tom, and good afternoon, everyone. Our recent quarter results continue to validate the momentum we are seeing in the business, as both advertisers and movie lovers continues to return to the cinema.

For the second quarter, our revenue and adjusted OIBDA were slightly better than the midpoint of the guidance we provided in May and also exceeded consensus estimates. A compelling slate of movies led by Top Gun, Jurassic World, Minion and Dr. Strange drove strong box office results.

We also got off to a great start in the third quarter with a larger-than-expected opening of store. Industry-wide, the box office was up nearly three times from last year, and the second quarter was the highest level of quarterly box office performance since the pandemic began.

With the continued upturn in movie attendance, we are seeing some very encouraging signals in our KPIs that position us well for the future with our advertising partners, who, as Tom mentioned, have begun once again to include cinema and their long-term marketing plan.

Total revenue for the second quarter was $67.1 million, up more than 4.5 times from last year and slightly above the middle of our guidance range. National revenue for the second quarter was $15.7 million, up nearly five times compared to the prior year and marks the highest quarter for national revenue in the last two years.

Local and regional revenue for the second quarter was $10.5 million, which was up two times compared to the same period of the prior year. Looking at our operating metrics, second quarter demonstrated clearly to advertising partners, our ability to deliver large, high-quality, captive young audience.

With a strong slate of releases during second quarter, our network attendance expanded with the box off. For the second quarter, our network theaters had attendance of $124.2 million, the highest level we reported since the pandemic began and an improving 67% of 2019.

This also represents the second quarter in the last four quarters, where attendance exceeded $100 million.

While this is still below, where we think we will ultimately be, it is a meaningful improvement from the first quarter where our attendance was just over 50% of pre-pandemic levels, representing continued progress of our business back to historical norms.

In addition, it is important to note that domestic box office per film so far this year was up 36%, once again, reflecting very strong consumer demand for the theater experience after a long two years of COVID lockdown.

With the higher attendance, we had a significant increase in impressions sold, which led to platinum sales in the second quarter that nearly equaled that of the fourth quarter of 2021.

In addition to improvement to the volume side of our business, during the quarter, we continued to see accelerating trends with our pricing, due primarily to a favorable client mix and higher platinum sales.

Our second quarter advertising pricing improved with national CPMs exceeding that of the second quarter of 2019 by 18.8%, making this the third consecutive quarter in which pricing exceeded 2019 levels.

Improvement in CPMs compared to pre-pandemic levels also accelerated substantially this quarter compared to the improvement during first quarter 2022 of 2.4% over 2019 levels. As a result of the improving metrics, our total revenue per attendee for the second quarter was again 91% of 2019, a level similar to the first quarter.

Our national advertising per attendee for the second quarter of 97.5% of 2019 was an improvement to the first quarter of 95.3%, and helped to offset the softness in our local ad business. In fact, for the last two months of the second quarter, national advertising per attendee reached out of the same period in 2019.

This improving trend clearly demonstrates that with consistent slate releases, marketers have strong demand to advertise across our platform.

Since the second quarter of 2021 was impacted by theater closures, we have compared our operating expenses for the second quarter of 2022 to the first quarter of 2022 to provide meaningful insights in our operating costs.

Second quarter operating expenses, excluding depreciation and amortization, were $53.7 million approximately a 7% increase compared to the first quarter. The increase was primarily related to higher affiliate expenses and higher theater access fees as a result of the seasonality of the business.

Selling and marketing costs increased approximately $0.2 million compared to the first quarter. This was also related to increased revenue activity for the quarter. Both network and administrative costs remained stable compared to the prior quarter, which reflects the effectiveness of our strict cost management, despite increased global inflation.

In the second quarter, our core operating expenses averaged approximately $6.5 million per month, compared to our pre-COVID run rate of $9.5 million per month for savings of 32%. Second quarter adjusted OIBDA was $15.1 million for a margin of 22.5% compared to a negative $18.7 million last year.

This was a bit higher than the middle of our guidance range provided in May. Looking at each month during the quarter, adjusted OIBDA and margins improved meaningfully throughout the current three months. This led to June, achieving the highest monthly adjusted OIBDA since the start of the pandemic.

In addition, adjusted OIBDA margin for the month of June also returned to pre-pandemic levels, which points to the scalability and high operating leverage of our business model.

This was great to see and reinforces our view that as the theater traffic builds back to normal historical patterns and we set our high margin platinum unit more effectively, our business is well positioned to perform at historical margin levels.

Integration and other encumbered theater payments due from AMC for the second quarter were $1.1 million compared to $0.2 million for the same period during 2021. As a reminder, integration payments are based on what NCM could have earned had advertising been sold in those theaters by our sales teams.

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 or adjusted OIBDA as they are recorded as a reduction to net intangible assets on the balance sheet.

For the six-month period, our total 2022 revenue was $103 million compared to $19.4 million from 2021, an increase of 5.5 times due to theater closures in 2021. Adjusted OIBDA for the six-month period increased to $8.2 million from negative $34.9 million in 2021.

The second quarter GAAP loss per diluted share was $0.01 versus a loss per diluted share of $0.28 during the second quarter of 2021. For six months of 2022, we reported GAAP diluted loss per share of $0.32 compared to a loss per diluted share of $0.53 in 2021.

Turning to our consolidated balance sheet, total debt, net of cash at NCM LLC at the end of the second quarter was $1.1 billion compared to $1.05 billion at the end of the year 2021.

The increase in debt was related to the $50 million revolver that was funded in January 2022, net of the approximately $25.8 million of NCM LLC's 5.875% senior secured notes, which NCM, Inc. acquired for an average price in the mid-70s during the second quarter.

This opportunistic investment was made in order to increase the overall return on NCM, Inc.'s cash balances which could then be used to fund future NCM, Inc. dividends and other NCM, Inc. corporate priorities. Our average interest rate on all debt was approximately 6% and for the quarter compared to 5.6% for the second quarter of 2021.

This increase was primarily due to the higher rate of a new $50 million revolver that was funded in January 2022. Excluding NCM LLC's revolver balances, approximately 72% of our total debt outstanding quarter end had a fixed interest rate.

NCM LLC's cash balance at the end of the second quarter was $57.7 million and including the $6.8 million of availability under the revolver, NCM LLC total liquidity at quarter end was approximately $64.5 million, which was in excess of our liquidity covenant that requires a minimum liquidity of $55 million.

Recently, our availability under our revolver increased to $7.2 million from $6.8 million due to the release of letters of credit secured by the revolver. Our consolidated quarter end cash balance, including $16 million at NCM Inc. was $73.1 million and including LLC's bonds recently purchased by NCM Inc., total cash and equivalents was $92.9 million.

The Board of Directors declared a NCM, Inc. regular quarterly cash dividend of $0.03 per share of common stock. The dividend will be payable on September 6th, 2022 to stockholders of record on August 22nd, 2022. On an annualized basis, the quarterly dividend results in a current yield of 6.7% based on today's closing share price of $1.78. The NCM Inc.

cash balance after payment of the dividend approved by the Board of Directors will be approximately $13.6 million, excluding the $25.8 million base value of NCM LLC bonds currently owned by NCM, Inc. The Board continues to prioritize financial flexibility and liquidity. We expect NCM, Inc.

to continue to pay a consistent dividend into the foreseeable future as we work through the deleveraging of the operating partnership NCM LLC. This is consistent with the company's intention to distribute substantially all of our free cash flow to stockholders during quarterly dose.

However, as always, the declaration, payment, timing and amount of any future dividends will be at the sole discretion of the Board of Directors, who will also consider general economic and advertising market business conditions in the company's financial condition.

We are very encouraged by the trajectory of our results and our ability to deliver value to our advertising partners as theater attendance builds back.

That said, our recovery will continue to have some flat spot as the film production process fully recovered from COVID-related delays and less release schedules built back to historical levels, and we evaluate the impact of a potential economic flow.

With respect to the broader economy and its impact on our business, it is important to note that historically, the cinema business has done very well through recessionary periods. As cinema continues to be one of the lowest price forms of out-of-home entertainment, we expect that trend to continue.

And while certain client categories may cut short-term marketing expenditures and fear of the recession, many important categories to us, such as auto have already been depressed over the last couple of years due to supply chain issues and thus, as those issues abate and more of their products become available, we may actually see an increase in those marketing budgets.

While we expect a dinner film release schedule during the late summer and early fall due to production and editing delays during the COVID lockdown, that is only a timing difference that we expect to clear quickly as the number of films is expected to again begin to increase in fourth quarter 2022 and into 2023.

Therefore, as we look towards the second half, from a results standpoint, we expect a lighter third quarter to be offset by a stronger fourth quarter, driven by the film release schedule and positive upfront marketing. Currently, we expect revenue for third quarter 2022 will be between $53 million and $57 million.

We expect third quarter 2020 adjusted OIBDA to range between $3 million and $7 million, with cash interest expense of approximately $16 million and approximately $0.6 million CapEx during the third quarter.

With the positive impact of our successful upfront and strong film schedule, we are expecting a strong Q4, resulting in full year revenue of between $265 million and $285 million of adjusted OIBDA to range between $58 million and $75 million.

The annual revenue and adjusted OIBDA ranges reflect both our optimism about Q4 and some conservatism with respect to the impact of the small economy on overall advertising spend.

Despite our year-to-date monthly core OpEx being at the lower end of our expectations, we are conservatively reaffirming our guidance for the full year of $6.5 to $7.5 million per month. We are also reducing our expected capital expenditures for the full year of 2022 from $6.5 million to $7 million to $5 million to $6 million.

In summary, we continue to see the momentum build in our business and a very positive outlook for the out-of-home advertising business in general as TV ratings continue to decline and social and other digital platforms face challenges with consumer privacy concerns.

As moviegoers return to theaters, there's no better place for marketers to find millennials and Gen Zs and our National CineMedia and digital networks. Also, as we continue to strengthen our moviegoer databases in ad campaign ROI tools, our network will become more and more valuable to our advertiser partners.

Given all of these favorable market trends, our business is well positioned to once again begin to generate meaningful free cash flow and start the process of deleveraging our business and bringing our equity value back to historical levels. Operator, please open the line for questions..

Thank you. [Operator Instructions] And we'll take our first question today from Eric Wold with B. Riley Securities..

Thank you. Good afternoon guys. A couple of questions.

I guess, one first off, in the guidance you're giving for the year and kind of the implied guidance for Q4, can you maybe dive into that a little bit deeper in terms of what are you assuming in there in terms of upfront commitments versus scatter? How much scatter you're assuming in there, maybe just broadly or you kind of let that represent more kind of potential upside going into the quarter? And then kind of what's the assumed CPM baked into that guidance increase?.

Sure. So in the fourth quarter, again, we have said that thus far in the upfront, we are about 85% of what we've seen pre-COVID on an average basis. And historically, in the fourth quarter, the company in terms of upfront versus scatter mix has always been around the 60% and 40% range.

We're assuming here in the fourth quarter to be very similar levels to kind of get to that full year revenue range of $265 million to $285 million. We do -- again, like we said on the call or in the opening remarks, sorry, that we do have a range that from $265 million to $285 million just given there are some economic uncertainties out there.

So we are accounting for a little of that..

I will also say, Eric, on your pricing comment on the CPM front, on the upfront, we're holding very steady versus historical upfront levels. And obviously, scatter is more competitive. But we're encouraged by the reaction we've been getting over the last several months from clients on the upfront. And I think that's probably the best critical metric.

Third quarter will be our last quarter, and we didn't have an upfront. So we're really encouraged by what the market is telling us in terms of the Q4 piece of the upfront. Obviously, some of the fourth quarter is going to be predicated on how the economy turns itself around and/or the recession, if there really is one or isn't one.

So those are key dynamics impacting scatter, but we're really comfortable based on our guidance that we're giving that the upfront is a really clear indicator of the strength of the ad market as it relates to cinema, not just for the fourth quarter, but for the 2023 outlook as well..

So do you expect if there was pressure from the economy, whatnot, that would both manifest itself in the scatter.

Do you feel more comfortable about the solidity of the upfront?.

Definitely. Yeah..

Okay. And last question. Maybe give us some of your priorities around the upcoming debt maturities over the next three years, the first one in June next year.

Are you looking more to address just the June 23 maturities or try to work something out that kind of addresses a larger portion of the debt in future years?.

You want to take that one, Ronnie?.

Yeah, sure. So again, we've both been focused on the June 23 maturities as they are, the ones that deal within a year.

I think it really -- again, this is a little bit fluid, just given where the overall credit markets are, but it really depends on where it is that will then kind of present the options of kind of extending beyond that, but we are definitely focused on the maturity engine..

Got it. Thank you both..

Okay..

Thank you. Next, we will hear from Jim Goss with Barrington Research..

Thanks.

I was curious, as you mentioned, the platinum spots and some greater usage, can you talk in terms of both the consistency of those spots and the creativity you might have in terms of maybe using multiple advertisers in various environments, or will it be again the same advertisers across the entire platform?.

So we have a really interesting platinum story. We now have sold Platinum in the fifth straight quarter many of the advertisers were never on the platform to begin with, including some of our travel clients as well as crypto. So it's a nice mix, probably 50-50 between new advertisers and existing advertisers.

The response we got from Platinum so far on the upfront has been very positive as well. We do believe, given its location, that it is probably the most valuable piece of inventory you can buy today, particularly to reach a large, scalable, young audience. So the platinum story is a very positive one.

This is the first time we've been really back in the market with Platinum with a full release schedule available to us and are reliable and that's scalable. Remember, when we started Platinum in the fourth quarter of 2019, we sold three spots right off the bat, and that was a healthy environment.

And then of course, during COVID, we ran into a little bit about hiatus. But the fact that we've had a platinum ad for five straight quarters in a row, I only see that number growing over time over the next year. And given the high dollar cost of it as well as the high CPM, it's a very positive sign to what people want to do with our platform.

So between that and our post-show inventory, we're quite happy with the response we're getting from that in the upfront..

Okay. And with the guidance, the third quarter, obviously, is being taken down a lot more than the fourth quarter where you see the recovery.

And I wondered if it's entirely volume-driven based on the big pause, it seems we're having the movies over this next couple of months through -- from mid-August into probably early October, and it's really the same type of pricing in all of the months, but less to price in the third quarter and maybe a recovery in the fourth are what I would say about.

Kirsten -- I would say, Jim, what's going on in the third quarter is a combination of a relatively light second half of the quarter release schedule. Bullet Train, which just opened is really the last big movie of the quarter. But I think it's also exacerbated both in scatter as well as in local as it relates to what's going on in the economy.

There's been a lot of documentation from other media companies about how soft the scatter market is right now. Hopefully, that will turn itself around at the end of the quarter going into Q4.

But right now, the combination of the slate for the last, call it, 1.5 months of the quarter as well as the scatter market is two things that are definitely impacting our Q3 guidance and performance. It's not so much a pricing issue, Jim, as it is an availability of open-to-buy dollars in the marketplace in scatter.

And that's been a good by several other CEOs in the media space as recently as last week and the week before..

Okay. And maybe one last thing. Attendance trends tended to be somewhat slower as there was a focus on a premium experience and in the bigger gap between the box office dollars, which we're recovering the attendants maybe not quite as rapidly.

Are you seeing a reversal in that? And do you think you should expect that the numbers you really need, which are the attendance figures should begin to accelerate, or is that more a wish and a hope than an expectation?.

I think there's definitely a high correlation between attendance and box office. What you know from the box office recently is the flights to more expensive, larger screens, which is driving higher prices on the ticketing side. So there's always going to be a spread of low to mid single-digits between box office and pricing.

But we're actually feeling pretty good about the attendance levels year-to-date and for the full year. And we're confident that next year is going to look a lot more similar to prior years. So obviously, we still have to keep track of all of this. But I think the attendance numbers, particularly when you look at June and July, are very good.

And we believe that, that's going to carry into the fourth quarter. I mean, the fourth quarter, release schedule is excellent. And as you know, fourth quarter is always our biggest quarter. So we're feeling pretty good about the fourth quarter right now as it relates to attendance and the attendance forecast for 2023..

You don't care how your CPM premium auditorium viewers be -- then you do an...

No, everything is based on attendance, not on the ticket price..

Okay. All right. Thank you, sir. Thanks, Tom..

Sure. Thank you. Take care..

Our final question will come from Mike Hickey with Benchmark..

Hello, Mike.

Thanks for taking my question. This is actually Joe Bernado [ph] on for Mike Hickey. Just one for me, if you could just talk about the $25 million bond buyback, which is great.

But given some concerns about liquidity, what gives you confidence to buy back 2020 maturities now especially maybe with the 2026 bonds trading at lower prices?.

Yes. So we looked at all the normal options, quite frankly, within the capital structure and really thought the secured bond given where it was trading. And really, quite frankly, the size of dollars that we want to put to work was really the only place that we can do it very efficiently.

And so we thought at kind of that mid-70s range, we've put about $20 million to invest in that was the right thing to do. And quite frankly, in a way that didn't really -- that the market action allowed us to do it really quickly. So and we felt confident about the future of business to do that at MCNE.

Awesome. Great. Thank you, guys.

Thank you..

That will complete today's question….

Go ahead. I got it. So from here, I'd let you just to make a few closing comments and those are the questions we got. So we are very encouraged about our continued positive trajectory of the business. The recent robust NCM [indiscernible] performance is particularly a focused piece of our business that we're really, really excited about.

It's a real-time indication of what's going on in the marketplace in terms of the reengagement on cinema media. We're also really encouraged by the return of a strong film slate, appealing to this very wide cross-section of audiences. The large audiences are returning to cinemas every weekend to watch their big movies on their big screens.

So there's much optimistic about when it comes to cinema advertising.

We're also seeing returns on investment into NCMx, our digital and data intelligence and analytics platform that's performing and transforming NCMx into one of the leading performance media companies able to deliver really meaningful business outcomes for clients tied really to the world's best content on the largest screens.

So the story of cinema and cinema version will only continue to strengthen the more robust film release schedule planned for the fourth quarter of 2022 as well as 2023. So I really do want to thank the entire NCM team for their hard work to help us move beyond the challenges of the past couple of years.

And thank our shareholders and lenders for their support and patience. We truly appreciate you joining us on a call and look forward to seeing you soon again at the movies. Thank you..

This concludes today's call. Thank you for your participation. You may now disconnect..