National CineMedia, Inc. (NCMI) Earnings Call Transcript & Summary

Hello, everyone, and welcome. I am Anna Lizzul on Alexia Quadrani's media equity research team. I am pleased to welcome Tom Lesinski, CEO of National CineMedia, to our J.P. Morgan TMC Conference. Tom was appointed CEO in 2019 after serving as both an independent director and chairman of the Board. He has extensive experience in Hollywood over the last 25 years ranging from TV production to home entertainment and advertising. Thank you so much for being here today, Tom.

Thank you very much for having me.

As a remainder to our participants, we'll be taking Q&A at the end of our discussion. So if you would like, please enter a question in the Q&A box and we'll answer at the end. And now we'll begin our discussion. Tom, could you provide us with an overview of National CineMedia?

Sure. We are the largest in-theater cinema advertising chain in the United States. We've got approximately 70% market share, representing 21,000 screens in the United States. We've got exclusive long-term agreements with over 50 different affiliates including the 3 largest chains; AMC, Regal and Cinemark. We're a very high margin, strong free cash flow business with 45% adjusted OIBDA margins, and providing a very attractive dividend yield as well.

Let's also dive into your 5 pillars of growth strategy. Could you remind us of these initiatives and how the company is working on improving these?

Yes. The first thing that we decided to do was really improve the quality and the actual value of our media to our advertisers. So in the fourth quarter of last year, we shifted 6 minutes of our 20 minutes of pre-show into its now after the showtime, advertised showtime. So 5 minutes of that is the right when the showtime starts and 1 minute is what's are called our Platinum Spot, which allows us to run an ad literally right before the second to last trailer. We had significant success in the fourth quarter around that initiative. In fact, we had our highest fourth quarter ever. It was a record for our national sales team. So once again improving the inventory. The second thing we've really looked at is trying to upgrade our planning proposals in our infrastructure. We spent 2 years now building out our IT infrastructure, and it's really designed to make it easier and faster for advertisers to buy our platform. And that will be fully implemented towards the end of this year, in the beginning of Q1. Our third big issue is really investing in our digital entertainment assets. We pivoted to being not just a cinema advertiser, but a digital media advertising company 2 years ago. We now got a host of apps and dot-com opportunities for our consumers to interact with our content and so our advertisers, in fact to also participate on screen advertising and screen media. The fourth thing we've done is really accelerated our data business. This was something I started about 9 months ago. We now have a 100 million separate data sets, supporting our advertising business somehow as to retarget consumers as they leave the theater and come back. And then finally, we're looking at expanding our theater network. We already have nearly 70% of the business, but there are other affiliates and other theater chains out there that we may look to get into business with. So we're actually trying to grow our impressions as well. So, those are the 5 core strategies that we're supporting right now.

Great. And in terms of the new inventory, how are advertisers and customers responding to the new advertising inventory following the scheduled movie time?

So fourth quarter was really our first big test of it and we had a really great response. It gave us the chance to talk to new advertisers we hadn't talked to before and it reinforced our positioning with some really big advertisers, including Amazon, Cadillac and Walmart. It was a record fourth quarter for us, driven a lot by Platinum and by our post-show advertising. And the response from advertisers has really been really good. There were some concern at one point that was representing my chain, so that people consume our content, but we've kind of future-proofed our ad model to creating a significant amount of new inventory after the time when most people arrive in the theater. So we're excited about it and the response has been really ongoing and good.

Yes. And with this new inventory that you are playing to showcase at the upfront, how are you now highlighting it to advertisers? And are you moving to a virtual format?

Yes. So this is the first new test on an upfront basis and a full year basis of our new advertising programing. So we're excited despite the disruption by COVID. We are going to run virtual kinds of advertising programs, probably with individual agencies and with brands. We eliminated our formal upfront in the theater a couple of years ago. So we've been doing one-on-ones with agencies and with brands. We'll do something on a virtual basis, probably beginning in June and July. But really at the forefront of that, and what we'll be showcasing is our new Platinum advertising and our new post-show advertising. So excited to finally get a full year's budget opportunity in front of advertisers because we've been really been doing it on a scatter basis prior to that.

Great. And kind of going along with that in terms of the films that are coming out later this year, there have been a lot of discussions around the theatrical window as certain studios are moving into PVOD releases or direct-to-streaming services due to the shutdown of theaters during COVID-19. How are you addressing those concerns longer term at National CineMedia?

There's certainly been plenty of coverage from the press regarding the disagreement between Universal and AMC and Regal and others. I do believe that the studios ultimately want to keep their movies showcased first in the theater and we think that's where they belong. I'm sure there will be test that go on. Having its few and far between in the long run, we believe the best place to watch a movie is in a theater. We know that these large corporations, including companies like Comcast, have a big broadband and cable business that supports streaming. But we do believe that the vast majority of movies coming out this year and next year and the future will start in the movie theaters where they belong.

Yes. And looking forward, how do you expect this year to play out with the volatility in the box office? I mean, do you anticipate there to be pent-up demand for cinemas in the second half as hopefully the majority of cinemas reopen by then? Also certain movies were shifted in and out of age to 2020, so how do you see those changing slate impacting advertising revenues?

I don't have a crystal ball to predict the next 6 months, but I'm going to do the best to give you my sort of interpretation of what I think may happen or may not. Candidly, no one knows, but we certainly talk to our main exhibitors and affiliates and the studios on a very regular basis. I do believe movies will come back slowly in the summer. I think particularly in July, there's some very big movies that are scheduled that could really be the beginning of the rebirth and the reintroduction of movies into consumers' minds and hearts. And I do believe going into fourth quarter with a significant number of really great movies, that you're going to really see consumers embrace the experience. What's interesting in all this is obviously we have to keep in mind what the government is doing in every city and every state, and the restrictions are being put on it. So to some degree, this is out of our own hands. And to some degree, obviously the theaters are going to try to do whatever they can to get consumers comfortable to coming back in the theaters. There has been some early data from the test going on in Georgia and Texas and in other countries that have proven that people really do want to get back in the theater. I can tell you having been cooped up in my house for 8 weeks, like other people, we're all really excited and really dying to get out and see some new programing. And movie theaters are really going to benefit, really before even television from an advertising point of view is that all the fresh programming that's already in the can today is in the movie theater. And the television business is going to be in rerun mode and then neutral for a long time while movies continue to be fresh. So we believe a great way to run an ad is in front of a really great new movie. So as new movies flourish, especially in the fourth quarter, I think we may end up getting more than our fair share of advertising as brands and agencies look for where is really current programing, and where are people excited to actually go and see a piece of content having been in their homes for many, many months. So we look at a bright fourth quarter in particular with the beginning of it starting slowly develop in the summer, and doing hopefully very well in July and August as the summer movie season tends to always be.

And do you see any geographies as potentially being harder hit by theaters phases reopening and things of that nature with governments mandating stay-at-home measures or a more social distancing than other?

Yes. It sure seems like there's certain hotspots in the country that are going to have more restricted measures than others. And there's some with super high density like New York City where you're sitting right now, which may take longer to get people comfortable to just come into the city, let alone to go out to a restaurant or a theater. In more big urban places with large suburban areas, it may be different. Also in the south, in the southwest, in the mid-west, we tend to think or believe that those areas will come back faster. But a lot of this can really be governed by how the governors and mayors and senators and Congress decide what's safe and what isn't safe, and what phase we're in and what phase we're not in. I know that the theaters are going to do everything they can to make it a comfortable experience and a safe experience. And obviously, that's the most important thing in all of this. But obviously, everyone is very anxious to get out of their homes and what a better way to do it in a traditional way than in the summer movie company experience. So I'm sure there'll be places that recover faster than others. Hard for me to put a finger on that. Obviously, a big city like New York, which has the challenges of commuting and elevators and subways and buses and trains, it's a bigger barrier beginning people to come back into an urban city. Whereas a city like Los Angeles where I live, where everyone drives, and there isn't as much of that, that maybe a faster recovery. But to some degree, it's out of our hands and it's going to really be in the government's hand and consumers following the rules that the government sets.

Yes. Just going back to the film slate and just your advertising in general, do you see any movie ratings which were particularly better or worse with advertisers like PG movies versus rated R movies?

Well, the biggest interest we have is typically in PG and PG-13 movies. Those tend to have the broadest appeal. They also tend to be the most common movies. They're also the most advertiser-friendly movies. We run ads in every form of rating, whether it's G, PG, PG-13 or R. But the most interest we typically have is on PG and PG-13, which is sort of really the bread and butter of our audience and of the consumer going part of it of the movie business.

Yes. And what is your typical mix of business between national and local advertisers? And leading up to COVID-19, did you see any particular areas of strength or weakness among the verticals?

We're a much more of a national advertising company, even though we have a big local business. I think about 80% of our business is roughly national. And we think national will recover probably the most quickly. Obviously, the local businesses in the United States have been very challenged by what's happened. Many of these smaller retailers or smaller stores we believe will probably take a little bit longer to recover than the national ones might. Although ironically, we've had a lot of our local advertisers shift into our digital platform just in the past couple of months. So we built a digital business to really start growing our business outside of core cinema and the local advertisers, many have shifted into that form. So I do think national will recover fast. It's always been our sort of core business. And local will probably lag a little bit behind that, but will still recover hopefully by the fourth quarter.

Great. Just wanted to remind our participants that they can enter questions in the Q&A box if they have any and I'll keep proceeding with the questions that I have for now. Just moving to the capital structure, historically you had been paying down debt while continuing to pay out cash flows back to investors and NCMI is continuing to pay a dividend even in this difficult environment. From a capital allocation perspective, which is a more of a priority to NCM? Is it paying down debt or distributing cash to NCM LLC members?

Well, it's always a bit of a balance. Our priority has always been to distribute cash to shareholders as our primary use of cash. We occasionally buy down debt opportunistically, but our focus has really been distributing cash back to shareholders in the form of the dividend, and also separately looking at investing opportunistically in different parts of the company. We've invested in digital and data a little bit. But we feel like the priority has to be supporting our history and our consistent history of providing an attractive dividend and dividend yield to our stockholders. So that's the priority. If we see opportunities where we believe that debt is a really good value, and as you know, most corporate debt is trading at very attractive levels, we may look into that more than we might normally. So that's the answer to that.

And also as a result of the COVID-19 pandemic, I know NCMI has also taken a great variety of cost cutting measures to lower expenses. Can you just talk about your cost cutting measures so far and what is the cushion that the company has right now?

So we started looking at this in mid-March, which was a couple of weeks even before theater started closing. And we started immediately cutting back what we consider non-essential things. We put a salary freeze in place. And then over the next 6 to 8 weeks, we looked into significant cost reductions both in the form of furloughing employees as well as reducing the cash compensation of every employee. We've gotten to a point now in addition to other operating expenses, we've cut our run rate to -- from $9.5 million a month to $5 million a month, so almost 50% which is a really significant reduction in our overhead. We -- so between of around $5 million overhead, we also have $4 million in the form of interest payments. Based on that $9 million run rate with the $214 million we have in cash and receivables, we believe we've got at least 18 months of runway even if we generate no more revenue or theaters are closed for a long time. So our liquidity and taking some of the risk out of our business has been a huge focus. Obviously, I had to make some really difficult decisions on the furloughing and on people's compensation and salary. It's the hardest thing I've had to do. We feel though that most of these people will come back soon. All of them will come back eventually we hope. But right now, we're managing the company really to make sure that there is an NCM around for a really long time, and that regardless of how long this crisis last, that we'll be in a position to come out the other side doing really well.

Make sense. And also I see the company received a waiver from its bank group. Could you tell us what that waiver entails?

Yes. So we had to go back out to get a waiver on our leverage ratio, both our overall leverage ratio and our senior secured ratio. And we secured a 5-quarter waiver, which is a very long waiver in terms of what historically has done in this world. It came obviously with some liquidity provisions and does not allow us to distribute cash from LLC to Inc. for the 5 quarters. But it creates an incredible amount of runway for our company to operate with our lenders in addition to our liquidity level. So it was a really important thing to get done. It was only secured in the last week. But we're happy we have that behind us and we're happy we have the liquidity, and just sitting and hoping and waiting that theatres open up quickly, and that we can quickly attract consumers comfortably back to something that they've enjoyed for probably a century.

Yes. And how do you expect impacts from COVID-19 to change your business for the longer term, if at all?

Well, I think the only thing I can put my finger right now is that we've had a really good experience of people working from home. I'm sort of from an older generation where you know, when I started growing up, we didn't even have computers in jobs. So I was little concerned about how well we could perform and how efficient we would be literally with everybody working from home. And I've been really pleased with the 500-plus employees that we have, that we haven't really missed a beat doing video conferencing. And even though it's a little cumbersome every now and again, I'm on probably a dozen video conferences a day as is the rest of our executive leadership team. And it's been surprising to me how efficient it's been and how effective it's been. So who knows, maybe that will become more of the part of the future. Obviously, the telecommuting part of this equation may affect lots of businesses. For us, the one thing we have to make sure is that we maintain relationships with our advertisers and with brands, which you could do a little bit online, but it's much better to do in person. So we're anxious to get our New York office and our L.A. and Chicago sales office reopened so our salespeople could get back and be close with their clients and with their agencies. So they can rekindle that long-term relationship we've had with many of them.

Yes. And the movie slate is looking strong for when theaters hopefully reopen in July with the Christopher Nolan movie coming out and in mid-July and Mulan rescheduled for July 24. Do you expect there to be a lot of pent-up demand here for all of these great temples who have been shifted to later in the year?

I got to tell you people have gotten through their Netflix queues. They've gotten through a lot of their Hulu advertising -- programming. They've gotten through some of Disney Plus, but I think a lot of people are really anxious to see something new. And the newest and freshest program is going to be in movie theaters this summer and in the fall. And luckily, we are primarily geared towards the millennial Gen Z audience. That particular demographic is the most interested in getting out of their homes, getting away from their parents in many cases, and getting back up into socializing and going to movie theaters, to malls and restaurants. So luckily, we're in a business that we cater to a very precise demo that is exactly the one that really wants to get out and get on with their lives and may get back to socializing and doing things that they like. So we do believe that that demographic is going to come back quickly and they're going to come back in the summer. So we're anxious to see it all happen. We know that safety and security are the priority for everyone in the country right now. We're anxious to see how the government unfolds every different markets and how theater start to perform. But we know the movie business will be back.

And also the Universal saw great hit with Trolls World Tour straight to PVOD release. And do you think that they would really be able to replicate that kind of success without theaters being closed?

Well, I think it's kind of a -- the way that that was modeled, there's never going to be a scenario again where there's no other option except staying at home. So the buy rates that they got I'm sure were very good, but they probably were artificially high based on the circumstances, I think if that were released in a different environment, where it was competitive with other things to do. But having said that, the discussions with premium video on demand, and we're going on for a 25 years in Hollywood. And it's not surprising that a company that is basically a broadband and cable distribution company, that they're leading the charge on that. We know that people can never match the communal experience of a movie theater in a big screen no matter what your age. So we look at the movie business being as the primary window and we expect it to be for a long time. And with the sequential distribution model that's been around for a long time, it's the right way to monetize a movie, may get the most out of it. So I'm sure there'll be a few more of these tests that happen. But we look at as a relatively small set of situations and the vast majority of movies will end up playing for some movie theaters.

Great. Well, I think we're all edging for some new content and for some movies to get back into theaters…

Yes. I mean, I'm really excited to see the Chris Nolan movie. I always need to see his movies 2 or 3x to understand what's going on. And that'll be a great way to restart the movie business is with a big interesting, exciting movie. And from what I've heard from my friends who've seen it, said it's really a great movie. So that'll be the first movie that I'll go watch it for sure.

Absolutely. We don't have any questions in the queue at this time. But thank you so much, Tom, for joining us at our conference. I really appreciate it.

Okay. Thanks for inviting me. I look forward to seeing you all in person next year in Boston.

Great. Thanks so much. Thanks, everyone, for participating.

Bye-bye.

Bye.