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

Hi, everyone, and welcome. I am Anna Lizzul on Alexia Quadrani's Media Equity Research team. And I am pleased to welcome Tom Lesinski, CEO of National CineMedia, to our JPMorgan 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. Just as a reminder to our participants, we'll be taking Q&A at the end of our discussion. You can please enter Q&A in the portal and we will answer it at the end. Now let's begin our discussion. Tom, could you provide us with an overview of National CineMedia?

Sure, Anna. Thank you. So we are the clear market leader in the cinema advertising business in the United States. We are the largest player in North America. It's fundamentally based on long-term agreements that we have with the 3 largest exhibitors, which run around 18 years each. We also had 50 other exhibitor agreements with most of the top exhibitors in the space. Typically, we have about a 70% share in the top DMAs; over 20,000 screens; and importantly, we've got 45% margins, really strong free cash flow historically, and a tax advantage dividend that runs a yield around 4% to 4.5%.

Great. Now we're finally beginning to look past some of the effects from COVID-19 as theaters in major markets, including New York and L.A., have reopened. How do you view the environment for cinema advertising currently as the film slate shapes up for the second half of the year?

It's a good question, and it's one we're focused on literally every hour of every day, analyzing every release. I think the early success of Godzilla and Kong, Mortal Kombat and Demon Slayer show that there really is a pent-up demand for moviegoing. It's clear to us that the advertiser demand also continues to be strong, and the question is really not if people will buy, but when they will buy. We're particularly encouraged by the second half slate, which looks really strong. Typically, the second half of the year, particularly Q4, is more oriented towards Academy pictures. In this case, there's a lot of big commercial movies coming out in the last 6 months of the year, including, obviously, Bond, Black Widow, Suicide Squad, Top Gun: Maverick, Spider-Man as well as Quiet Place 2 and Cruella coming out this weekend. Obviously, Memorial Day is an important weekend for us. There's a lot of confidence brewing around those 2 movies performing well. But we look at the 4th of July as really being the justification and validation that the movie business is back, particularly as that is one of the key weekends of the year, and we expect our business to really start picking up in July.

Great. And before the pandemic, you had to introduce new pre show advertising inventory. How have those advertisers and customers responded to the new advertising inventory following the scheduled movie time?

The reception actually from advertisers has been very strong. We rolled out that inventory, as many of you recall, in Q4 of 2019, it subsequently led to a record Q4 ad revenue business for National CineMedia. Unfortunately, the pandemic came just a quarter after that. But I'm confident as the business gets up and running again, which it is, that we'll be able to leverage that lights-down and platinum inventory. It clearly has improved our advertising platform and increased the value of our media currency. When you add 6 minutes of advertising basically to the post showtime availability, it's obviously very attractive to advertisers. I think I would expect this new inventory to be even more relevant today versus a couple of years ago as the rapid decline of TV GRPs has become clearly evident to the marketplace. It's a difficult time for brands to reach a young audience and no medium really reaches teens and millennials and Gen Z the way we do. I have to remind everybody that our network average age demographic is 30 years old compared to network TV, which is 55, and compared to cable, which is 50. So we feel really good about chasing those millennial and Gen Z consumers.

Great. And with this new inventory that you are showcasing at the virtual upfront, how are you highlighting it to advertisers? And how are you seeing the demand for cinema shape up as the media reopens?

So our incumbent advertisers, many who have been with us for 20 years, are telling us they plan to come back. Many of them have already come back. In fact, we've had significant advertisers, including Amazon, that have been with us the whole time. Some will be back in the third quarter. Others will be back in the fourth quarter, but we're seeing a real increased demand from new clients, given the sharp decline, particularly in TV ratings. I need to remind people that on a typical weekend, we deliver about a 6.2 rating. The next closest thing to that is really Sunday night football during the year, which is a 4.8 rating compared to the average week day rating for broadcast and cable, which is around 2.8. So right now, the receptivity is really good. We're excited about the Memorial Day weekend that's coming upon us. And the summer kick off and the return to the theater business as we've been closed down by the government for almost 15 months in many cases. And right now, 95% of our network is open, and we're excited as all of these summer releases finally get back to where they belong, which is in the movie theater.

Great. Yes. I know there's been quite a bit of discussion around the theatrical window, of course, during COVID. Certain studios moved to P bond releases or went direct to streaming services due to the shutdown of theaters during the pandemic. I was wondering how do you address those concerns more long term?

I think the most important thing is that there is a theatrical window. And while it historically had been longer, the fact that most studios are going to a 45-day window is really significant for preserving. [Technical Difficulty]

You're on mute, Tom.

Okay. Sorry about that. A little technology challenge. We were talking about windows and the impact of windows. I'm comfortable with a 45-day window as it generates, basically all the impressions that we need from a typical theatrical release, given the huge percentage of customers that come within the first 30 to 45 days. The fact that Warner Brothers has signed up for 22 for a 45-day window, and that Universal, Paramount, Sony and Disney are all supporting theatrical window is really positive. [indiscernible] Okay.

Great. Yes.

Great.

And just looking forward, how do you expect this year to play out really with the volatility in the box office? There's so much anticipation for there to be pent-up demand for cinemas in the second half as theatrical releases return, but also at the same time, certain movies were shifted in and out of the second half of 2021. So really, how do you see this changing slate impacting your advertising revenues?

I think when you look at the second half of this year, the slate is every bit as strong as it's been in 2019, particularly with a lot of the big summer movies moving to the fourth quarter. You're going to see a fourth quarter that I think it would be as strong as many that we've seen in the past decade, given that it's a real mix of big commercial movies as well as big academy-type movies. So from my perspective, the cinema advertising business is really going to look good, marrying up to that second half of the year. And I really do believe there is a demand. I think you're going to see this weekend, in particular, Memorial Day weekend, you're going to see really big box office numbers out of Cruella and Quiet Place 2. And I think with the infection rate as low as it's been and the vaccination rate obviously doing well, with government restrictions minimal in most cases, we should start approaching a run rate towards the end of this year that's comparable to 2019 heading into 2022. So I'm excited about the box office, as most of the exhibitors are right now, and so are the studios. So it will be really an interesting weekend going into the fourth of July following a month later.

Okay. And we've got several more questions, but I just wanted to remind the audience that if you would like to ask a question, you can please enter it in the Q&A box on the portal. And just moving to a discussion more about movie ratings. I was wondering which fared particularly better or worse with advertisers? Or PG-rated movies more favorable versus rated-R movies?

It's a good question. The bulk of our clients buy all the ratings, but we see the strongest demand typically against PG-13, which is often combined with R. But there's also brands that are targeting families who want to buy G and PG. So it's really important to think about that when you think about targeting advertising to a theatrical crowd, you can reach a large 18 to 49 group through PG-13 or through R or through a family audience on the G and PG side. It's also interesting that movies are one of the few places where there's actually co-viewing as kids really can't go to the movies by themselves. So the ratings are highly supportive of targeting, and it's something that the theater business can really deliver from a cinema advertising point of view.

Yes. And just building on your commentary there about co-viewing, in terms of the mix of business, you see, what's your mix between national and local advertisers?

So about 80% of our revenue roughly comes from national. And then the rest comes from local and from our beverage relationship that we have with people like Coke and Pepsi. But we're pretty much an 80% national business.

And right now, are you seeing any verticals particularly interested in cinema advertising as we're emerging from the pandemic?

Yes, we are. I mean, ironically, the biggest participants in our platform tend to be entertainment companies, including Amazon and Google and Hulu that are trying to reach people who love entertainment. So that's how we've been a strong segment, and it continues to be. As does the telecom segment, QSR, travel and the insurance categories are all particularly interested in participating on NCM's platform.

And that's an interesting comment, given that a lot of the entertainment companies are interested in advertising on cinema. What do you think about if streamers will come into release movies and theaters and how that might impact your business?

We see that as 1 of the ironic benefits of the streaming business. More and more tests are happening with companies like Netflix to do a theatrical window. In many cases though, tests have been really positive. So I do believe with others, potentially Apple, of course, Netflix, and maybe even Amazon, that they'll look at the theatrical window as another opportunity to reach a great audience and also to raise, I would say, the quality perception of any piece of content. All talent really wants to see their content in a theater first. It's something that producers, directors, actors and actresses really care about. And I think we have a good chance from an exhibitor point of view, attracting some of that content based on the new windowing and also their interest in having a theatrical validation for their content. It also helps with the awards part of their business.

Right. I just wanted to take a moment and move to the capital structure of NCMI. Historically, you have been paying down debt while continuing to pay out cash flows back to investors. NCMI is continuing to pay a dividend as well. Just from a capital allocation perspective, which is more of a priority [indiscernible] numbers?

Fundamentally, it's important to understand that NCM's structure was really built to be a pass-through to its 4 owners. And historically, while we have paid back a modest amount of debt, particularly in '18 and '19, over time, our intention is really to distribute the majority of our free cash flow. So from a capital structure perspective, we feel comfortable with our leverage ratio around 4x, which was our historical pre-COVID level. And fully optimized leverage at 3.5 to 4x would be a sweet spot for us.

Great. And just we have an audience question that just came in. Do you have any commentary on CPM trends as advertisers are starting to come back to the medium? And would we see any compression relative to pre-pandemic levels?

Historically, as many of the investors and analysts know, we've been a super high CPM platform, certainly in the realm of media with the exception of things like the Super Bowl and the Final 4 and the NBA Finals, we're right at the top of that. And while there's always negotiating that goes on, we're confident that in the long run, that we'll be able to retain our CPM levels as we emerge out of this post-COVID era. Candidly, what really advertisers are focused more on is just having some flexibility as they buy in the upfront. And I think we'll accommodate that. But candidly, we believe in the long run, our CPMs will keep -- will stay at a very high level like they were before.

Great. Great. And as a result of the COVID-19 pandemic, NCMI took a variety of cost-cutting measures to lower expenses. Looking at the state of the business now, what is the liquidity cushion that the company currently has?

Well, just to kind of level set for a minute. So our pre-COVID run rate, expense run rate, was around $9.5 million a month. And right now, the most recent quarter, was $5.6 million. So we're still saving 42%, which is significant. From a liquidity point of view, we had cash of $119 million, which we announced in our last call. And we believe that will give us a clear ramp through the business all the way through in the second half of '21.

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

Yes. I actually don't think it's going to have an impact in the long run. And while we are concerned at one point that older people wouldn't go to the theater, and now that they've all been vaccinated to a very high degree, we don't see there being a long-term impact from COVID. I think the fundamental changes in the industry are worth keeping an eye on. But I think now that the vast majority of people who want to get vaccinated, have, that the impact will be certainly minimal. I think more significantly, given the rapid decline in linear television GRPs, that, that shouldn't [ create ] a tailwind for the cinema advertising business. So we don't really see COVID as really having a material impact on our business in the long run, if at all.

Great. Well, I think that's a great place to stop. I think those are all of our questions for today. But thank you so much, Tom, for joining us. We really appreciate your time.

Well, thank you for having us, and we look forward to seeing everybody again at your next conference. Thanks a lot.