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

All right. Good afternoon, everybody. I'm Stephen Weiss, the high-yield cable and media analyst at BofA Securities, and I'm very pleased to welcome National CineMedia back to our Leveraged Finance Conference. With us on hand from the company today is Tom Lesinski, CEO; as well as Ted Watson, Senior Vice President of Finance. As always, if you have any questions, please feel free to put them into the webcast portal, and I can pose them to management for you. And with that, I will turn the floor over to management.

Hi. This is Tom Lesinski speaking, and thank you for joining us. We have a few slides that we posted to the web portal. We're going to call out some of them just by page number. If you have a chance to see them, it will help a little bit. We'll spend maybe 10, 15 minutes on slides, and then we'll spend the rest of the time answering your questions. Not knowing who's out there and how much knowledge you have of our company or not, I'm going to kind of start with just the basics and then we'll get into some of the more of the specifics. So National CineMedia is far and away the largest player in the cinema media space. We have over 20,000 screens, 700 million attendees a year. We've got about a 70% market share in the big markets. The company is almost 20 years old. It was founded by the 3 largest theater circuits, AMC, Cinemark and Regal. We have 54 agreements, with additional network affiliates in the cinema media space. One of the most significant changes we made, just to help future-proof the company, was to create 5 minutes of inventory in what we're calling the lights-down period of a movie and the 60-second premium platinum spot that we've added that airs just before the second to the last trailer. The company has 45% margins, which is a hugely attractive part of our investment thesis and extraordinarily consistent in high free cash flow over the last 10 years. Importantly, we have had consistent growth despite the cinema business in general being relatively low growth. We believe post-COVID, that the company will grow to high single-digit growth next year. As it relates to why people love our business and why advertisers do switching a little bit, the average demographic of a National CineMedia theater attendee is in the early 30s. That compares favorably to broadcast, which is 55 in primetime and cable, which is around 50. We have a very high demographic in terms of income. The average NCM moviegoer is over $92,000 a year, which is -- indexes at over 129% versus a typical U.S. population. In terms of how we compete, I mentioned earlier that we have almost a 70% share in the top 10 DMAs. That's across 1,700 theaters. We have approximately 12 screens per theater. Just to put in perspective, the ratings composition that we have, this is on Page 9, on a typical Friday and Saturday, National CineMedia would get a 6.5 rating. That compares favorably to Monday Night -- Sunday Night Football, which gets a 6 rating; to primetime audiences on ABC, CBS and NBC of 2.4 to 3.4; and Thursday Night Football of 4.5. So very highly rated shows. On Page 10, we shifted our business to beyond the big screen to a digital platform, which we'll talk about in a minute. We also control all the lobbies and the lobby entertainment networks at our various exhibitors. About a year ago, we outlined a new growth strategy, on Page 12, to bring this company back to not just being a dividend company, but also a company that has growth characteristics. We did 5 things. The first one I already mentioned, which was increasing the quality and value of our media. Secondarily, we upgraded our entire planning and proposal and inventory tracking system to allow us to be more seamless and in fact, to allow a media buyer to buy our product basically within 24 hours of adhering to be more competitive with digital. We've continued to invest in our digital entertainment products and our digital ad inventory. Importantly, we've built a first- and second-party database of over 100 million -- 115 million data sets. And lastly, we have looked at aggressively growing our network by focusing on adding several key new screens, exhibition screen partners over the next year or so. What I'm going to do now is not get into each of these strategies. We can talk a little bit about these more. But I thought it would be productive to just briefly talk about a couple of just case studies to prove what we're doing really works. What we've added is a digital component to our cinema screen component. If you look on Page 21, for example, we went to a QSR, and we combined our digital footprint with our footprint that's associated with the screens. So when someone leaves the theater, we know that they were in the theater by their phone. We can retarget them, send them a promotion, send them to anywhere. We did that with a well-known QSR fast food burger chain. They got a 42% lift in store visits from that. So we know this combination of building a digital business, in connection with our core screen business, is very valuable to advertisers. It also allows us to charge a higher CPM than a traditional cinema media company. As we sort of move through our growth businesses, we intend to continue to engage fans before, during and after the movie. Historically, we were just a straight-up cinema media company. So you'll see more and more of us, not just in the theaters, but before someone arrives at a theater and after they leave. So I'm going to now quickly shift to the financial highlights, and I'm going to turn it over to Ted to go through some of the key financial metrics of the company.

Yes. Thanks, Tom. And just to clarify, for folks on the phone, I think at the beginning of the presentation, Tom, you were talking about, with the lights-down, we were expecting a mid-single-digit lift. I think you said mid-single-digit growth next year. Just to be clear, we have not provided any guidance for next year. I think you were speaking more, just in general, with the post-show that, that would be the CPM lift. So I just wanted to be clear about that. On the February call, we'll certainly, if conditions warrant, provide more formal guidance. Starting on Slide 25. This is the ownership structure of the LLC. You can see down there at the bottom, the LLC is the operating entity. This is where the debt sits, and then you have the 4 owners. So AMC, Cinemark and Regal, they comprise 52% of the ownership. And then the NCM Inc. shareholders comprise 48%. So under normal times, when NCM LLC is distributing available cash, each of these owners would get their pro rata share each quarter. If you want to go to Slide 26, this is the 2019 revenue composition. Typically, 80% or so of our revenue is generated from the national and regional business. This is sold on a CPM basis. You have about 15% that's local and then another 6% that's beverage, that's via Coke and Pepsi contracts with the exhibitors that are then forwarded back to us per the terms of the ESA. If you go to Slide 27, this gives you a good snapshot of our national ad business. In 2019, we added nearly 50 customers, with fast-growing verticals in insurance, restaurants and food service and professional and business services. If you look at the top verticals, media and entertainment is the biggest category at 17%, followed by insurance, communications, electronics and auto sales. So good diversification there, and then you can see we further play well with CPG, video games, restaurants, travel, tourism, et cetera. I think one thing that's important to note is the high-quality base that we have of customers. So during the pre-COVID time, if you look at the AR that was outstanding on the books pre-COVID in March, we had about $115 million of AR. And through the last 7, 8 months, we've been able to collect over 95% of that. So again, we have high-quality customers that are not necessarily impacted by the COVID pandemic. If you go to Slide 28, again, I won't touch on everything here, I think the point is this is a business model that's one -- that's consistent and high free cash flow. Adjusted OIBDA, consistently over $200 million, with margins north of 45%. It's an asset-light model. CapEx typically runs about 3% of revenue. And then all of that allows for high free cash flow conversion, again, 95%-plus free cash flow conversion, again, running north of $200 million. If you go to Slide 29, this is our debt structure. Again, I think we sit in a pretty good position from a capital structure standpoint as far as any debt coming due. We do have a revolver that comes through in 2023. But if you look beyond that, you're in 2025 for the term loan, then we have senior unsecured notes due in 2026 and then senior secured notes due in 2028. You can see the different coupons on each of those on the slide. It's important to note that in April, due to the pandemic, we worked with our lenders to get a waiver through Q2 of 2021 for our leverage covenants. So they are waived. There are 2 stipulations to get that waiver. One is a minimum liquidity of $55 million, and the other is we are prohibited from distributing available cash to the founding members and NCMI shareholders during that time. We are in compliance with these requirements and expect to be so for the foreseeable future. If you go to Slide 30, to wrap this up again, again, just to conclude, it's a strong cash flow business, high margins. The other thing I would point out here is we have a tax advantage dividend that I don't think everyone fully appreciates given that the dividends deemed a return of capital. You do not pay taxes on that dividend. It's actually a reduction on the basis of your equity. But as of today, we're running just north of an 8% dividend yield. And with that, Stephen, I'll turn it back over to you for Q&A.

All right. Thanks for that overview. So let me just start off. I want to spend some time maybe getting your perspective of the state of the exhibition industry. So obviously, there's been secular concerns for some time, and yet the domestic industry has recently posted record box office results not that long ago and has tended to grow through times of economic turmoil in the past. At the same time, some may argue now that people are perhaps growing more accustomed to a first-run window in the house, and studios obviously have been delaying or diverting product to streaming platforms as they see fit. So I guess the question is how much of the recent pandemic has caused permanent shifts that we should be worrying about? And how and when we'll -- we would be able to fully gauge this impact with confidence? And what gives you confidence that the sector completely snaps back?

I think it's really hard to focus on the unknown. With all of that having said, I'll try to. We have a lot of things that are clearly variables that we cannot control, whether it's government closures, whether it's the theatrical release schedule, whether it's the various windowing that's happening with various studios. I do think that the performance of Croods, the movie this weekend, was a good indication of not if this industry is going to recover, but when. And when I look at how good the performance was given that only about 45% of theaters are open, and the movie actually did even better than Tenet did when all the theaters were open, I think is some indication that consumers are going to come back. And I think that's sort of the start of the beginning of all this. And as I look forward, I do see a gradual return on the industry beginning in Q1, moving through to a really, I believe, will be a solid summer release schedule and ultimately lead to very good advertising support from our many clients who are already supporting our business. So I don't believe that the pandemic is going to have a significant effect on people's behavior. And we know there's a significant pent-up demand from all the research we've done with consumers. And while the various studios will be testing different windows and availability, I'm confident that consumers will come back to the theaters as soon as there's a real release schedule and real big movies coming out, beginning with Bond in April.

Okay. In terms of the pipeline in the '21 though, there's obviously been a lot of shifts going on. A lot of people view next year as still kind of being a transition year. I guess how healthy do you think '21 can ultimately be? I guess a lot of it is going to be dependent on vaccine timing and things like that. But what are you hearing from your key advertisers as you're approaching next year at this point?

Well, we're actively in the upfront right now. And I think the most important metric we have, which is probably the best indicator, is the confidence that advertisers have in our platform. We typically do about 60% of our business annually in the upfront. We're working through about $145 million in deals right now. Those are all advertisers who have worked with us in the past and who are candidly planning on working with us going forward. And as you know, the upfront goes from Q4 of this year, to Q3 of next year. And we've actually been quite pleased with the response we're getting from advertisers. So advertisers see consumers coming back. It's really hard to quantify. And I wouldn't want to give you a forecast just yet. But we believe the summer release schedule as it currently stands is very strong. And I think it's likely that we're going to see a really strong consumer presence come back this summer post the availability of vaccine and with a real release schedule that's indicative of what has happened historically.

Okay. And that $145 million, is there any relevant reference points to prior years or not really?

I think, in 2019, we ended up finishing with $200 million. So right now, those are just current deals that we're negotiating. I'm sure we'll end up doing a number that won't be as high as 2019 was, but it's certainly a good indication that advertisers are supporting our platform.

Okay. And then the other recent topic, obviously, has been the Universal deal with, initially, AMC and then recently, Cinemark. So recognizing that 70% or 80%, call it, of a movie viewing occurs within those first 3 weekends, the question is do you expect consumer behaviors to change if they sense a movie may become available on a pay window months earlier than before? And how do you gauge that impact on your business? And how do we gauge how widely adopted this might become with respect to other chains or studios without knowing what Universal is sharing in terms of back-end economics?

This is all very, very new, and there's nothing really in the market to suggest that anyone can forecast the impact of the negotiations that AMC and Cinemark did with Universal. The Cinemark deal, in particular, as it provides 5 weekends on big movies, which I believe gets to almost 90% of the box office, I believe that's really a great thing for the industry and will ensure that the biggest movies stay in theaters for a long time. I think on the other side of it, that a relatively short window from theatrical to SVOD will ensure that some of the bigger players, like Netflix and Amazon and Apple, look at the theatrical window that they might not have looked at before. And some of those tests are already underway as well. I think it's going to take a long time for consumers to figure out what the windowing is until there becomes consistency. That's more pervasive. There's plenty of other studios, obviously, that have to make decisions on windowing and availability. And I think what will be initially a sort of patchwork of availability, it won't be until the windowing really gets solidified across all the majors and all the chains on the exhibition side that you'll be able to sort of sort out what it means for a consumer. I'm optimistic that really there is going to be a theatrical window on big movies. I come from the movie business for 20 years. I know that it's critical to extract as much revenue as you can to support the budgets of a $200 million to $300 million movie, and it has to have a theatrical release to recoup. So I do believe the biggest movies that drive most of the box office will be in theaters from 3 to 5 weeks at a minimum, exclusively. And then we're just going to have to see what happens on the SVOD side. I think, right now, to measure the success or lack of success with COVID still being out there and out there pervasively for many more months, it's a little bit of the exhibitors fighting with one arm behind their back. In terms of comparing it, so I think until you get to a post-COVID world, the windowing question has to be looked at then versus looking at it now. And then certainly, there will be a lot of experimenting happening over the next 3 to 6 to 9 months. But until the pandemic's behind us and people are free to go out without government restrictions, without capacity restrictions, I think it would be premature to sort of assess the success or lack of success of any windowing initiative from any studio or exhibitor.

Okay. And then the -- I wanted to talk a little bit about your primary exhibitors in terms of their health. Obviously, AMC and Cineworld's debt is still pretty distressed despite the recent rally we've seen in the credit markets. Cinemark entered the downturn much better prepared arguably, and Cineworld obviously got a welcome runway extension. But the question is if there are sector restructurings ultimately, do you see any practical impact on your business given the ability to reject or rework contracts? Is that a practical concern for you? And do exhibitors that no longer hold an equity stake in you, like AMC, do they have a different vantage point than those that do hold the stake?

Well, this is a lot of hypothetical questions going on right now. We're really pleased that the founding members have been part of National CineMedia for almost 20 years. Obviously, that changed slightly with AMC. But we're confident as the leader in this category, with a 70% market share and the highest CPMs, that the affiliates and the founding members will stick with the leader in the industry versus anything else. I think as theaters open and close during a restructuring process, there's so much capacity available in this industry, and the utilization rates are so low. I think even if there were a reduction, even a significant reduction in theaters, that the actual attendance levels wouldn't necessarily be that impacted by that. Just about everybody has access to multiple theaters wherever they live. I don't want to comment on any contractual issues candidly that we have that are confidential with any of the founding members or affiliates, especially during a sensitive time for any of them, so I'll leave that at that for now.

That's fair. Well, just given your last comment though, do I take it to -- in terms of the industry screens, does it -- do you feel the industry is over-screened even before this pandemic?

Well, I think most people, most analysts would agree with that. I think with the utilization rates being, I think, only around the 20% level annually, that would indicate that there's plenty of unused seats out there. Many theaters and screens have closed already during COVID. Some will return, some will not. I do think, in the long run, post-pandemic, as companies get their capital structure lined up, that ultimately, a year from now, this industry is going to look a lot healthier. And I think, ultimately, the consistency of attendance will get closer to where it was in 2019 in a matter of a year or 2. I think what's interesting, if you really look at our business, between 2009 and 2019, the actual attendance levels in the U.S. are flat. And while they've been up and down year-to-year during that period, it's pretty remarkable given the amount of competition that's hit the exhibition industry, that there's still a lot of resilience in the actual consumer coming to theaters. And the fact that 10 years have gone by and the actual attendance levels are relatively flat compared to the same levels in primetime television, which are down 40% during the same period, we feel that the migration that's really hit the digital SVOD world has really come from television viewers. And when you really look at the amount of attendance affected, by theaters, it's much smaller than that. So I think the cinema business will hold its own. I think people love going to the movies. It's one of the few things that social animals consistently do every weekend. And I think everyone's excited to get back to the theater, and the fact that we have 2 vaccines coming out, we had a movie open this past weekend that, on a per screen, the average was very, very good, especially acknowledging that New York, Philadelphia, Chicago and L.A. were closed. I think there's really some light at the end of the tunnel. And I think when we're talking about this next year at this time, it hopefully will be a memory that we'll all soon forget.

Let's all hope for that. I did have a question. I know you highlighted your recent business model change, which I guess was -- happened around this time last year. Does the structure of this change in a post-COVID era put the company at any sort of disadvantage with respect to anticipated revenues relative to costs as it relates to minimum guarantees or otherwise?

The vast majority of our structure cap with our exhibitors is variable. So as attendance goes down, our cost structures go down. So candidly, the way this relationship was built, most of our structure that associates with paying theater access fees are variable. There are some that are fixed, but it's a small percentage of the total theater access fees. So the company was always structured to benefit from increases or decreases in attendance. The platinum spot itself is a revenue-sharing agreement, where we get to keep the lion's share of the actual revenue. We did pay a small increase in theater access fees for the right to do that, but we're comfortable with the contract that we've gone through a few times. And we believe that the platinum spot as soon as theaters reopen and have attendance will have the same success it had in Q4 of this past year.

Okay. We have a few more minutes. I did want to ask you just briefly on the balance sheet and liquidity. I guess a multipart question. Given where your bonds are trading, can you speak to your ability and inclination to repurchase debt on the open market? And then if you talk to that in the context of your overall funding status. And I know you referenced the covenant waiver through, I think, second quarter, do we need to get that extended beyond that, do you think?

We talked in our last earnings call about an additional extension that we expect to have in the marketplace in a couple of weeks as we work with our agent bank. So many of the exhibition partners have gotten extensions on waivers in the last several quarters. So we expect to do the same. As it relates to buying back debt, our term loan, in particular, has come back pretty strong lately, just in the last month or 2. So I think what we'll do is sort of see how COVID plays out, look at the return of revenue and attendance back into our business, and then we'll decide what our capital structure looks like now. And I think, for the time being, to do anything during COVID, that would be particularly different than what we've done in the past. It would not be prudent.

You value the liquidity too much at this point?

I think any company that's in -- related to exhibition right now or in exhibition, liquidity has to be the priority. And I think there obviously is less unknowns than there were a couple of months ago before there was a vaccine and before theaters started reopening. But I think we've got to be prepared for the worst, but also plan for what could be a much better situation. So right now, we've taken a lot of precautions on our cost structure. Over half of our company has been either furloughed or let go. And we've been very conscious of preserving capital since the beginning of March, and we'll continue to do so until theaters regain their traction and until consumers return to the theater.

Got it. All right. Well, with that, I think we are over time. I appreciate -- I think we've covered a lot of good ground here. And as always, thank you for participating, and we'll get you back again next year, I'm sure.

All right. But hopefully, it will be in person.

Hopefully, in person.

All right. Take care. Thank you.

Be well.

Bye.