National CineMedia, Inc. (NASDAQ:NCMI) Q3 2023 Earnings Call Transcript

National CineMedia, Inc. (NASDAQ:NCMI) Q3 2023 Earnings Call Transcript November 7, 2023

National CineMedia, Inc. misses on earnings expectations. Reported EPS is $-0.34 EPS, expectations were $-0.14.

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. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] At this time, I would like to turn this conference over to Dan Dorenkamp, Director of Finance. Please, go ahead, sir.

Dan Dorenkamp: Thank you. Good afternoon. I’m joined today by our Chief Executive Officer, Tom Lesinski; 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 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.

Tom Lesinski: Welcome to our third quarter 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 1,400 theaters, the company annually reaches over half of the highly desirable 18 to 34 year old demographic and 73% of the opening weekend box office of the biggest U.S. movie releases. NCM maintains exclusive agreements with the three 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 10-year 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. 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 cinema 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 of this past year, which was quickly and diligently completed in under four months. We eliminated almost $1.2 billion of debt and approximately $90 million of annual fixed charges, substantially strengthening our balance sheet and improving our financial flexibility. We also entered into a $55 million exit financing facility, which is being used to fund operations and growth initiatives, further empowering 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 moving-going audiences while 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 third quarter results. The cinema industry saw positive signs of recovery this quarter as network theater attendance exceeded 130 million, a 24% increase from the 106 million attendees in the prior year, and roughly 80% of pre-pandemic levels. This recovery was largely propelled by the compelling movie slate led by Barbenheimer, the simultaneous film release in July of the cultural and box office hits Barbie and Oppenheimer.

The third quarter of 2023 has continued to demonstrate that Americans, specifically those age 18 to 49, love going to the movies. The key demographic accounts for 70% of our audience, and we have reached 53 million of them to date. The Gen Z demographic made up 54% of the audience in the third quarter with an average weekly rating of 6.6 demonstrating that this elusive, influential young demographic remains excited about the in-theater movie experience. The third quarter also saw an approximately equal gender split among movie goers, with males making up 52% 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 third quarter 2023 total revenue was $69.6 million, up 28% compared to the third quarter of 2022 when we generated $54.5 million. 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 2022-2023 upfront. Approximately 73% of the third quarter’s national revenue was attributed to those longer-term upfront commitments. This was critical to mitigate the continued softness in the short-term TV and video marketplace that has impacted the overall market for five 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 2023-2024 upfront resulted in over 6% growth versus the prior year, coming across all major ad categories. With a 27% increase in the number of our upfront advertisers for 2023-2024 compared to the prior year. One key to our success was the marketing of a reimagined “silence your cell phone” courtesy sponsorship position leading into the post-showtime trailer pack. This drove significant additional revenue from two 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 fourth quarter and expect full year revenue growth of approximately 4% year-over-year. On top of this, our local sales team also saw a resurgence in ad demand for the third quarter with revenue up approximately 32% compared to the same period last year, with the Midwest region demonstrating particular strength.

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 third quarter. Year-to-date the box office was around $7 billion, up 26% over last year, with over 600 million tickets sold. This summer finished with just over $4 billion 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. There were 220 million tickets sold at the box office during the third quarter, the biggest third quarter since 2019, with all eyes on the cultural phenomenon of Barbenheimer, where each bill impressively drew box offices greater than $300 million, grossing nearly a $1 billion combined.

Barbie eclipsed the $600 million mark domestically, making it the highest grossing release of 23 and 11th all-time thus far. For comparison, over the first seven days of Barbenheimer, CineMedia 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 million people attending the movies. As we enter the fourth quarter, 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.

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 seven times more attention to NCM ads than ads on social media platforms such as Instagram, Facebook, and TikTok. Important to note, on average, NCM moviegoers spend three 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 fourth quarter, which is the strongest quarter for cinema advertising, there is an exciting slate of exclusive theatrical releases across many high-turnout film genres that are set to open.

A digital billboard on a bustling street corner, showing the modern way of advertising.

The unexpected addition of Taylor Swift: The Eras Tour sparked increased interest and demand during the typical quieter October period, as brands wanted to connect with the biggest cultural moment since Barbenheimer. Within three weeks of the announcement of the concert film’s premiere, NCM fully sold out all available inventory for the initial four 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 one or number two in terms of market share within their category.

Almost all of these Taylor-led sponsorships were packaged together with larger NCM commitments in Q4, generating more than 25% of the total projected ad revenue for the quarter. Taylor Swift: The Eras Tour movie has delivered a record-breaking box office performance, totaling over $166 million 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.S. during The Eras 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 Beyoncé which will be released globally in theaters this December. As part of an exciting fourth quarter 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 fourth quarter of 2023 compared to the same period in the prior year.

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 fourth quarter of 2023, we will begin to launch our programmatic ad platform, making NCM the first player in cinema advertising in the U.S. to offer 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 their marketplace, while also providing an opportunity for more advertisers to purchase fraud and bot-free impressions. 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 an unparalleled premium video advertising platform. With the 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. With that, I’ll turn the call over to Ronnie to provide you with more details on operating results and future outlook.

Ronnie Ng: 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.’s results if the businesses were consolidated for the entirety of the third quarter of 2023. To be clear, during the Chapter 11 process, NCM Inc. was not consolidated with NCM LLC, but will be going forward. For the third quarter NCM’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 fourth quarter and finish the year strongly. As Tom shared earlier, the third 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 third quarter of 2023 saw the return of two historically top spending categories that were slower to come back into the cinema marketplace post pandemic, wireless and insurance. 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 third quarter with average revenue per sales executive increasing 34% compared to the prior year, an increasing 50% compared to the same period in 2019. NCM’s total revenue for the third quarter was $69.6 million, compared to $54.5 million for the same period in the prior year.

National advertising revenue increased to $52 million, up 31% compared to $39.7 million in the third quarter of 2022, driven primarily by an increase in impressions sold and attendance. Local and regional advertising revenue increased to $12.9 million, up 32% compared to $9.8 million in the third quarter of 2022, driven primarily by an increase in contract activity and average deal size within the beverage, government and healthcare service categories. Turning to our expenses. This quarter, we incurred a significant amount of one-time expenses related to our Chapter 11 restructuring. Third quarter operating expenses were $220 million compared to $58.7 million in the prior year. Out of the $220.3 million in expenses in the third quarter, there were $162 million in charges related to our financial restructuring, other one-time items, depreciation, amortization, and non-cash share-based compensation.

Excluding these charges, pro forma operating expenses were $58.3 million compared to $47.5 million in the prior year. The increase in pro forma 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. Third quarter adjusted OIBDA, excluding non-cash charges, and one-time items was $11.3 million, compared to $7 million in the prior year for a 61% increase.

Additionally, margin improved by 340 basis points to 16.2% compared to 12.8% in the third quarter 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. Turning to our consolidated balance sheet. At the end of the third quarter, the company had $23 million of cash and equivalent and total debt of $10 million compared to total debt net of cash of $1.1 billion 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 million in annual fixed charges. We also eliminated certain non-profitable exhibitor contracts and restructured or eliminated office leases, which resulted in a combined $8.3 million in annual cost savings.

Additionally, we entered into a $55 million ABL facility with CIT Northbridge. Upon the effectiveness of the agreement, we drew $10 million from the facility, which represents the only amounts currently outstanding under the ABL and the minimum amount required to be drawn. Further, our financial restructuring resulted in a simplified ownership structure through which NCM Inc. now owns a 100% 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 1/10 ratio. NCM currently has 96.8 million 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 fourth quarter 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 two entities, NCM Inc, and NCM LLC’s results will be very similar. Looking ahead, we expect revenue for the fourth quarter of 2023 to be between $85 million and $88 million. In addition, we expect adjusted OIBDA for the fourth quarter of 2023 to be between $30 million and $33 million. With no debt, an 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 simplify corporate structure will also enhance NCM’s financial flexibility and promote growth for future success. Operator, please open the line for questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] Today’s first question comes from Jim Goss with Barrington Research. Please proceed.

Jim Goss: Okay. Good afternoon. I have a couple of questions. First, given, what you just said Ronnie, is there a reason to keep both NCM and NCMI alive? Is it reserved for future use in case there might be some reason? Why are they so separate?

Ronnie Ng: 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.

Jim Goss: Okay. And perhaps, Tom, do you think, are there revamped business aspirations some broadening of your – what you intend to do or should you be staying focused on restoring a more robust performance of the existing platform before you make any other steps? For example, your platform is noted to be 18,400 screens. I think you mentioned a 1,450 theaters, 190 DMAs. While this is very extensive, the full U.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 black period?

Tom Lesinski: 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 million of our annual fixed charges. 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 cinema platform or doing potentially other things, that’s what will be informing our shareholders and the market over the coming quarters. 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.

Jim Goss: Okay, maybe one last one for now. What share of ad revenues in the fourth quarter are locked up with upfront agreements or make good eatinginto any of the Q4 revenue projections that might cause that slight decline, I think you’ve noted?

Tom Lesinski: I’ll let Ronnie take that one.

Ronnie Ng: Yes. So for the fourth quarter 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?

Jim Goss: I was just thinking, do you have any make goods that might be eating into the fourth quarter, what expectations?

Ronnie Ng: 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 fourth quarter, 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.

Jim Goss: Okay, thanks. I’ll let it go at that.

Tom Lesinski: Thank you.

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