National CineMedia Q3 2023 Earnings Call Transcript

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November 7, 2023

There are 6 speakers on the call.

Operator

Good day, and welcome to the National CineMedia Inc. Q3 2023 Earnings Conference Call. Today, all participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. At this time, I would like to turn this conference over to Dan Dorinkamp, Director of Finance.

Operator

Please go ahead, sir.

Speaker 1

Thank you. Good afternoon. I'm joined today by our Chief Executive Officer, Tom Lisinski And our Chief Financial Officer, Ronnie Ng. I would like to remind our listeners that this conference call contains forward looking statements within the meaning of 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. All statements other than statements of historical facts communicated during this conference call and may constitute forward looking statements.

Speaker 1

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.

Speaker 1

These reconciliations can be found at the end of today's earnings release or on the Investor Relations page of our website at nzm.com. Now, I'll turn the call over to Tom.

Speaker 2

Welcome to our Q3 2023 earnings call. It's been about a year since we've done a public earnings call, and I'd like to take a brief moment to give an overview of NCM for those of you who are new to our story, as there has been a lot of positive changes over the past year. So let's get started. National CineMedia is the long term category leader in cinema advertising. And with over 18,000 screens in more than 1400 theaters, the company annually reaches over half of the highly desirable 18 to 30 And 73 percent of the opening weekend box office of the biggest U.

Speaker 2

S. Movie releases. NCM maintains exclusive agreements with the 3 largest national cinema chains in the United States, AMC, Cinemark and Regal, along with approximately 40 other agreements with affiliate theater chains. We recently completed A successful renegotiation with Regal for a new tenure agreement, which will continue to create growth and value for the company. Through our industry leading scale, NCM continues to be a leader in the overall premium video advertising marketplace.

Speaker 2

With the development of NCMX, our leading data driven audience platform, along with a number of first to market data and attribution initiatives, NCM has transformed CIMA into a medium that delivers both brand building and performance metrics, including advanced targeting and attribution capabilities. As many of you already know, since we last spoke, NCM has gone through a significant balance sheet transformation, which has positioned the company for future cash flow growth and success. We are and will remain focused on deploying that cash to provide the greatest return to shareholders. We successfully concluded our financial restructuring on August 7th this past year, which was quickly and diligently completed in under 4 months. We eliminated almost $1,200,000,000 of debt and approximately $90,000,000 of annual fixed charges, substantially strengthening our balance sheet and improving our financial flexibility.

Speaker 2

We also entered into a $55,000,000 exit financing facility, which is being used to fund operations and growth initiatives, further powering NCM's momentum as we propel forward and continue to drive shareholder value. With a strengthened balance sheet And as one of the very few NASDAQ listed media companies with no net debt, NCM is now very well positioned to optimize and leverage its unmatched scale and offerings, connecting the biggest brands with the sought after movie going audience as well at the same time creating significant shareholder value in the process. This quarter, we also announced a number of new board members who bring extensive digital, technology, advertising, media and financial experiences to our company. NCM's strong executive team continues to lead the business and has partnered closely and seamlessly with the new Board to drive growth initiatives and aggressively build the company back as cinema audiences return to theaters. Now we will turn to our focus to 3rd quarter results.

Speaker 2

The cinema industry saw positive signs of recovery this quarter as network theater attendance exceeded 130,000,000, A 24% increase from the 106,000,000 attendees in the prior year and roughly 80% of pre pandemic levels. This recovery was largely propelled by the compelling movie slate led by Barbanheimer, the simultaneous film release in July of the cultural and box office hits Barbie and Oppenheimer. The Q3 of 'twenty three has continued to demonstrate that Americans, specifically those aged 18 to 49 love going to the movies. The key demographic accounts for 70% of our audience and we have reached 53 of 1,000,000 of them to date. The Gen Z demographic made a 54% of the in the 3rd quarter with an average weekly rating of 6.6, demonstrating that this elusive influential young demographic remains excited about the in theater movie experience.

Speaker 2

The 3rd quarter also saw an approximately equal gender split among moviegoers, With males making up 52 percent of audience and females making up 48% of the audience. Additionally, 59% of audiences this quarter were multicultural, With 28% of attendees being Hispanic, 14% African American and 16% Asian, it is clear that cinema creates a unique shared experience that brings people together of all ages, genders and races. Despite the continued slower pace of the scatter ad market, NCM LLC's Q3 2023 total revenue was $69,600,000 up 28% compared to the Q3 of 2022 we generated $54,500,000 Our strong results were driven by both national and local sales and we are very encouraged by this performance. A key to our national success this quarter was the solid base of upfront business already written in this quarter from the 2022, 'twenty three upfront. Approximately 73% of the 3rd quarter's national revenue was attributable to those longer term upfront commitments.

Speaker 2

This was critical to mitigate the continued softness in the short term TV and video marketplace that has impacted the overall market for 5 straight quarters. Despite a challenging scatter marketplace, NCM saw strong Q3 demand from key categories, including a resurgence in spending from the wireless and insurance categories, alongside continued support from automotive, travel and entertainment sectors. Importantly, national cinema revenue per attendee was up 6% year over year. NCM National also successfully navigated through the 2023, 2024 upfront marketplace this summer, which was marked by a combination of flat to down demand overall for premium TV and video, The continued ratings erosion from traditional linear broadcast and cable TV options and the still nascent growth of ad supported premium video streaming options and the combined impact of the Hollywood strikes on the new content pipeline for both linear and streaming. Despite these scatter headwinds, NCM's 2023-twenty 24 upfront resulted in over 6% growth versus the prior year coming across all major ad categories.

Speaker 2

With a 27% increase in the number of our upfront advertisers for 20 three-twenty four compared to the prior year. One key to our success was the marketing of a reimagined silent your cell phone courtesy sponsorship position leading into the post Showtime trailer pack. This drove significant additional revenue from 2 major NCM advertisers who will share that unique and valuable real estate in 2024. In addition to this level of upfront commitment, we are very well positioned for strong sales in the Q4 and expect full year revenue growth of approximately 4% year over year. On top of this, our local sales team also saw resurgence in ad demand for the 3rd quarter With revenue up approximately 32% compared to the same period last year, with the Midwest region demonstrating particular strength.

Speaker 2

The government, beverages and healthcare categories led the way in demand locally and were also supported by an uptick in education, travel, Tourism and transportation. Turning to the box office. The industry continued to make its gradual return to pre pandemic levels in the Q3. Year to date, the box office was around $7,000,000,000 up 26% over last year with over 600,000,000 tickets sold. This summer finished with just over $4,000,000,000 in box office sales, the first time the box office has hit that mark since 2019 and 19% higher than the same period last year.

Speaker 2

There were 220,000,000 tickets sold at the box office During the Q3, the biggest Q3 since 2019 with all eyes on the culture phenomenon of Barbanheimer, Where each bill impressively drew box offices greater than $300,000,000 grossing nearly $1,000,000,000 combined. Barbie eclipsed the $600,000,000 mark domestically, making it the highest grossing release of 23 and 11th all time thus far. For comparison, over the 1st 7 days of Barmenheimer, Synamide delivered a higher rating among 18 to 34 year olds than This year's Super Bowl, which was the most watched Super Bowl of all time, and July 23 was the biggest box office month since 2016, with over 125,000,000 people attending the movies. As we enter the Q4, we remain laser focused on expanding our client base and continuing to unite brands with the young diverse audiences who show up consistently each week at the movies. Through our category leading pre show, we deliver one of the most attentive, leaned in diverse audiences, regularly outperforming TV and CTV against the 18 to 34 year old demographic.

Speaker 2

In fact, moviegoers recall 72% of our cinema ads and have a 64% increase in brand awareness. On average, cinema has almost double the amount of average viewing time per ad compared to the NFL, NBA, College Football and Major League Baseball combined. As we've shared in the past, cinema is the number one video platform consumers' attention, with consumers paying 7 times more attention to NCM ads than ads on social media platforms such as Instagram, Facebook and TikTok. Important to note, on average, NC and Moviegoers spend 3 times more than the general population across a wide range of categories, making them a very attractive high value target for advertisers. Looking ahead to the Q4, which is the strongest Quarter for cinema advertising, there's an exciting slate of exclusive theatrical releases across many high turnout film genres that are set to open.

Speaker 2

The unexpected addition of Taylor Swift, The Eris Tour, sparked increased interest in demand during the typical quieter October period as brands wanted to connect with the biggest cultural moment since the Barb and Hymer. Within 3 weeks of the announcement of the concert films premiere, NCM fully sold out all available inventory for the initial 4 weeks of the run with category leading brand partners including United Airlines, Capital One, State Farm and Burger King among many others across major categories looking to align with yet another cinematic cultural event. NCM generated 32 ad campaigns tied to the Taylor Swift, including 12 new advertisers who returned to cinema for the first time Since COVID and with more than half of our advertisers leading in their industry either as number 1 or number 2 in terms of market share within their category. Almost all of these Taylor led sponsorships were packaged together with larger NCM commitments in Q4, train reading more than 25% of the total The Arrow's Swift, the Arrow's Tour movie has delivered a record breaking box office performance totaling over $166,000,000 in sales thus far, positioning itself as one of the biggest movies of the year. Furthermore, 22 of the top 25 theaters in the U.

Speaker 2

S. During the Eros tour opening weekend are part of NCM's network, helping brands reach a highly sought after audience of 82% women and 63% 18 to 34 year olds. We expect this energy will continue with the Renaissance, A film by Beyonce, which will be released globally in theaters this December. As part of an exciting Q4 slate, which also includes The Marvels, Aquaman and the Lost Kingdom, The Hunger Games prequel, Napoleon, Wish and Wonka. We expect this slate will lead to a stronger performance at the box office in the Q4 of 2023 compared to the same period in the prior year.

Speaker 2

These films will provide brands with new valuable opportunities to place their message alongside the best professionally produced brand safe content in the world, reaching sought after audiences at scale not available in any other premium video ad platform. Further, in the Q4 of 'twenty three, we will begin to launch our programmatic ad platform, making NCM the 1st player in cinema advertising in the U. S. To programmatic solutions on the big screen, advancing our data centric approach. Programmatic ads will provide media buyers with efficient, data driven and high quality ad inventory in the marketplace, while also providing an opportunity for more advertisers to purchase fraud and bot free impressions.

Speaker 2

The biggest brands understand the power being united with the millions of young diverse consumers who are at the movies each and every week. And these brands are leveraging NCM to tap into the cultural phenomena and the unique shared experience of cinema. NCM is unparalleled premium video advertising platform. With continued growth of our industry, we are well positioned to enhance brand campaigns, driving ROI on cinema advertising spend. NCM is poised to grow year on year revenue again at the box office as the box office continues to move forward and audiences levels continue to rebound toward 2019 levels.

Speaker 2

With that, I'll turn the call over to Ronnie to provide you with more details on operating results and future outlook.

Speaker 3

Thank you, Tom, and good afternoon, everyone. Before I dive into the results, I want to note that today, I will be discussing NCM LLC's operating results, which would have been similar to NCM Inc. Results if the businesses were consolidated for the entirety of the Q3 of 2023. To be clear, during the Chapter 11 process, NCM Inc. Was not consolidated with NCM LLC, but will be going forward.

Speaker 3

For the Q3, NCN's revenue and adjusted OIBDA were above Street consensus. We expect that these results coupled with strong industry tailwinds will set us up for solid performance in the 4th quarter and finish the year strongly. As Tom shared earlier, the 3rd quarter saw the continued recovery of the cinema industry led by Barbenheimer driving a 28% increase in total revenue compared to the same period last year. We also saw several major advertising categories show signs of recovery and momentum throughout the quarter. Nationally, the Q3 of 2023 saw the return of 2 historically top Spending categories that were slower to come back into the cinema marketplace post pandemic, wireless and insurance.

Speaker 3

At the same time, NCM saw continued investment from the entertainment, automotive and travel categories, which rely on the young, diverse and affluent cinema audiences. In our local sales business, We saw productivity levels increase during the Q3 with average revenue per sales executive increasing 34% compared to the prior year and increasing 50% compared to the same period in 2019. NCM's total revenue for the Q3 was $69,600,000 compared to $54,500,000 for the same period in the prior year. National advertising revenue increased to $52,000,000 up 31% compared to $39,700,000 in the Q3 of 2022, driven primarily by an increase in impressions sold and attendance. Local and regional advertising revenue increased to $4,900,000 up 32% compared to $9,800,000 in the Q3 of 2022, driven primarily by an increase in contract activity and average deal size within the beverage, government and healthcare service categories.

Speaker 3

Turning to our expenses. This quarter, we incurred a significant amount of One time expenses related to our Chapter 11 restructuring. 3rd quarter operating expenses were 200 and $20,000,000 compared to $58,700,000 in the prior year. Out of the $220,300,000 in expenses in the 3rd quarter, there were $162,000,000 in charges related to our financial restructuring, other one time items, depreciation, amortization and non cash share based compensation. Excluding these charges, pro form a operating expenses were 58,300,000 compared to $47,500,000 in the prior year.

Speaker 3

The increase in pro form a operating expenses Was mostly related to higher theater access fee and affiliate costs from increased attendance, The new Regal affiliate agreement and increased commission costs from higher revenue compared to the prior year. Since the new Regal relationship is an affiliate agreement, the expense of the agreement was reclassified from ESA theater access fees and revenue share to advertising operating costs, which is where all the costs of our network affiliates reside. 3rd quarter adjusted OIBDA, Excluding non cash charges and one time items was $11,300,000 compared to $7,000,000 in the prior year for a 61% increase. Additionally, margin improved by 340 basis points to 16.2% compared to 12.8% in the Q3 of 2022. Throughout our financial restructuring, we work diligently to keep expenses in line and we're ultimately able to operate more efficiently this quarter compared to the prior year.

Speaker 3

Turning to our consolidated balance sheet. Compared to total debt net of cash of $1,100,000,000 at the end of 2022. Changes in debt were related to our financial restructuring, which was completed in August of 2023, resulting in the reduction of approximately $90,000,000 in annual fixed charges. We also eliminated Certain non profitable exhibitor contracts and restructured or eliminated office leases, which resulted in a combined $8,300,000 in annual cost savings. Additionally, we entered into a $55,000,000 ABL facility with CIT Northridge.

Speaker 3

Upon the effectiveness of the agreement, we drew $10,000,000 from the facility, which represents Further, our financial restructuring resulted in a simplified ownership structure through which NCM Inc. Now owns 100 percent of NCM LLC and continues to serve as its manager. A year ago, prior to the Regal agreement and our financial restructuring, NCM Inc. Owned 47.5% of NCM LLC. Following the completion of our financial restructuring in August, The Board of Directors and our stockholders approved a reverse stock split of our common stock at a 1 for 10 ratio.

Speaker 3

NCM currently has 96,800,000 shares outstanding following the reverse stock split, Cancellation of Regal's shares and the issuance of shares in accordance with NCM LLC's plan of reorganization, each of which took place in August 2023. Turning to guidance. We will be guiding NCM LLC standalone for the Q4 of 2023. To reiterate, this quarter, we presented NCM LLC's operating results given the deconsolidation and reconsolidation that occurred due to our financial restructuring. Moving forward, Given the reconsolidation of the 2 entities, NCM Inc.

Speaker 3

And NCM LLC's results will be very similar. Looking ahead, we expect revenue for the Q4 of 2023 to be between 85,000,000 and $88,000,000 In addition, we expect adjusted OIBDA for the Q4 of 2023 to be between $30,000,000 $33,000,000 With no debt and unlevered balance sheet In industry tailwinds, NCM is well positioned for growth. The company generates significant free cash flow due to low capital expenditures and with an adjusted OIBDA to free cash flow conversion of greater than 80%, NCM has numerous opportunities to return value to shareholders as the industry recovers. NCM's simplified corporate structure will also enhance NCM's financial flexibility and promote growth for future success. Operator, please open the line for questions.

Operator

We will now begin the question and answer session. As a reminder, today's event is being recorded.

Speaker 4

Okay. Good afternoon. I have a couple of questions. First, given what you just said, Ronny, is there a reason Keep both NCM and NCMI alive. Is it reserved for future use in case there might be some reason?

Speaker 4

Why are they still separate?

Speaker 3

So that Jim, thank you for the question. That's a good question. So It is the company actually preserved the structure of both Inc. And LLC, given the original when we originally founded the company back in 2007 for tax purposes. And so keeping that structure in place is still advantageous for the operations of the company.

Speaker 4

Okay. And perhaps, Tom, do you think are there revamped Business aspirations, some broadening of your Tend to do or should you be staying focused on restoring a more robust performance of the existing platform before you make any other Yes. For example, your platform is noted to be 18,400 screens. I think you mentioned 14 50 theaters, 190 DMAs. While this is very extensive, the full U.

Speaker 4

S. Screen base is about 40,000. And while some are with arrival and some may not be worthwhile, Should you be expanding the platform? Should you be partnering in any other ways? How are you looking at the business right now coming out of this

Speaker 2

I think what you asked is a really important question. I think I would go back to looking at what happened in the restructuring. And when you think about where we are, we eliminated 90,000,000 So these additional resources provide us with an opportunity to really assess all the options that you mentioned, but also focusing and deploying that cash in a manner that really provides the best return to shareholders. And whether that's a combination of growing our existing Synra platform or doing potentially other things. That's what we'll be informing Our shareholders and the market over the coming quarters.

Speaker 2

What I think is really encouraging, Jim, is when you look at our balance sheet And you look at our cost structure, we have a lot of options, and we plan to make the most out of this opportunity, particularly focusing on the cinema business.

Speaker 4

Okay. Maybe one last one for now. What share of ad revenues in the 4th quarter are locked up with upfront agreements? Are make goods eating into any of the Q4 revenue projections that might cause that slight decline, I think, you've noted?

Speaker 2

I'll let Ronny take that one.

Speaker 3

Yes. So for the Q4 guidance, just speaking of National advertising, roughly 70% of that is estimated to be from the upfront market. And so the remaining 30% is via the scatter market. And can you just restate the second part of your question again, Jim?

Speaker 4

I was just thinking, do you have any make goods that might be eating into The Q4, what's your expectations?

Speaker 3

Yes. So we've as you know, we've done historically done a very good job of managing our make goods and our audience deliveries with our advertisers. Like every frankly, like every Q4, we will be eating some of that make good because That is the goal, but there really isn't a lot to speak of here.

Operator

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

Speaker 5

Hey, Tom, Ronnie, nice to hear from you guys again. Congratulations on your quarter and your emergence here. Just two questions. 1, looks like we're Close here to getting a resolution, Tom, on the strike. Maybe you've already heard, I don't know.

Speaker 5

It sounds like they had a breakthrough and Fingers crossed here. They get a deal done. Just curious if you can sort of expand upon how the strike has Impacted your business and thinking about 4Q and 2024. And as a fact, we do get A resolution here, which, again, fingers crossed, how you're thinking about the 2024 Market growth opportunity? That's the first question.

Speaker 5

2nd question

Speaker 2

Let me answer that one. Let me Let me answer that one first and then we can go to the second one because I want to make sure I remember everything you asked. So there's been no impact on this year's business from the strike in terms of the cinema ad business. There was definitely some noticing of it in the upfront. Some of our entertainment specifically related advertisers, we're focused on the next 12 months.

Speaker 2

But what will happen is assuming this gets resolved, Mike, in the next couple of weeks, which I think we're all optimistic about based on what happened today, It will take probably 30 to 60 days for the studios to figure out where they are from a production point of view on the movies that are scheduled for 2024. So, presumably within a relatively Sure time, they will get the actors schedules and their own production schedules sorted out. So, we can't give Any more visibility on 2024 until they really make those announcements? There have been 3 movies that have moved from 2024 to 2025. I suspect there will be additional movements going back and forth between 2024 and 25, but you'll know a lot more about that in the next, I would say, 30 days to 60 days from the time the strikes result.

Speaker 2

And hopefully that will be well before Thanksgiving.

Speaker 3

What's your second question?

Speaker 5

It's part 2 here, first question. If the box is sort of flat to slightly down next year, do you think you can still grow Your business in that sort of environment?

Speaker 2

I think our goal is to look at 24, regardless of how the box office and attendance looks as an opportunity to grow revenue per attendee. And I think realistically now that we have the restructuring behind us And we've got an opportunity to really devote all of our attention and resources towards cinema advertising. I'm optimistic That we can grow revenue per attendee next year.

Speaker 5

Thanks. Part 2 here. 2nd question, your 4Q guide look great versus expectations, But year over year, a little bit down in revenue and a little bit more down And EBITDA, just hoping, Ronnie, you could give us sort of a puts and takes there on 4Q. And I imagine, given The hell that you guys have gone through, you're probably being a bit conservative here, not to say that you are, but how are you thinking about philosophically guiding In this environment. Thanks, guys.

Speaker 3

So the Q4 this year, our What went into our guidance is assuming that the softness that we see in the scatter market continues for the rest of the year. That's really what's kind of reflected on our estimate when you compare that versus last year being Slightly down. The adjusted OIBDA is obviously a reflection of some of that, but you also Here, you have what the difference is, is also the new Regal Affiliate agreement is baked into obviously is baked into the Q4 of this year, which is on a different set of economics versus the prior year.

Operator

I would now like to turn the conference back over to Tom Lisinski for any closing remarks.

Speaker 2

Thank you for the questions and of course all your support With audiences continuing to return to cinemas each and every week, there's a lot to be optimistic about when it comes to National CineMedia and Cinema Advertising. With an exciting slate of content lined up for Q4 and several advertising categories showing signs of momentum Throughout the quarter and positive trends in the cinema ad space, we look forward to a strong finish to this year and are optimistic about the future So I want to thank the entire National CineMedia team In all of our offices across the U. S, I want to thank the NCM Board for all their hard work and particularly thank our shareholders and our advisors for their support and guidance over the past year. We appreciate you joining the call today and look forward to seeing all of you at the movies. Thank you very much.

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National CineMedia Q3 2023
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