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

Thank you for joining us today. I'm Marlane Pereiro, and I cover high-yield cable and media at Bank of America. We're happy to have with us today Tom Lesinski, CEO; and Ronnie Ng, CFO from National CineMedia here with us today. Thank you both for joining. We're happy to have you.

As a starting point, can you discuss the recovery you're seeing in theater attendance and ad trends?

Sure. Well, thanks for having us, first of all. We're very pleased with the recovery of the exhibition marketplace. The fourth quarter is looking really strong, particularly the last 4 weeks of December. You probably saw that Spider-Man broke all kinds of Internet sites yesterday when ticket sales literally went through the roof. That hasn't happened since 2019 where any Avengers: Endgame did the same thing. So we're seeing the box office trending towards 75% to 80% of the market than it was in 2019 going into the fourth quarter, and we're optimistic that trend will continue into next year. The ad sales business is recovering as well. Obviously, when you go to buy a ticket, it happened instantly, but we just completed a big chunk of our upfront business. As we mentioned in our earnings call last month, literally, we're at about 75% from a contracted basis versus 2019 upfront sales levels. So it's very encouraging. I think if anyone needs any proof about the state of the business, you can see from what's happening in November and December how strong the Exhibition business has been despite mandates for vaccinations and despite the COVID uptick. The business continues to perform really well, and we're really happy about it.

Great. Thank you, Tom. So during the pandemic, studios experimented with movie releases. So any thoughts on how this could impact the theatrical window longer term?

Yes. So thank God, the experiments are pretty much over with for the last 1.5 years. The studios decided to use COVID as an opportunity to experiment with day and date releases, direct to streaming releases and hybrid ones. I think the studios are basically seeing that the exhibition marketplace is really critical for big movies. All the major studios have committed in one way or another to a window for the exhibitors. It's typically 45 days. So all the majors are expected to window all their big movies going forward. There may be some hybrid ones. But for the most part, the experiments didn't really pan out, and we're really relieved as an industry that the exhibitors and the studios are now in a lockstep basis to provide that important 45-day window or longer to support exhibition. So we think the tests are over. We do believe there's obviously going to be movies playing into theaters for a long time. Yes, there'll be some hybrid ones here and there. But for the most part of the big movies, not only have the consumers wanted it, but so have the directors, the actors and the producers of this movie. So we've seen a lot of news about talent wanting their movies in theaters, and we're really happy that it looks to be back to normal beginning now.

Great. And obviously, supply chain issue has been some very topical. So I'm just curious what you're seeing in terms of any impact on ad spend? I mean, obviously, auto in particular has been topical. So just any impact there that you can comment on?

Can you just repeat that? Because there's a bunch of background noise going on. I'm not sure where it's coming from. It sounds like someone shuffling [indiscernible]. Could you just say that again? I'm sorry, I lost...

Sure. No, not at all. So basically, the question was supply chain issues are very topical. So I was just curious about any impact you're seeing on ad spend. And then obviously, auto has been topical, among the topical. So any commentary there?

Sure. Yes. So the supply chain piece of the business has had a minimal impact on our national ad sales. The only piece we've seen is on the domestic car business. The international car business, particularly the Korean manufacturers like Kia and Hyundai have not been affected as far as we can tell, and they continue to advertise on our screens. So we've seen a little bit of an effect on it on the domestic U.S. car business. But no other category candidly has had a supply chain issue for us on an advertising side. Part of that is a function of the fact that a lot of our clients are entertainment clients like Amazon and Facebook and Google and they don't have supply chain issues really. The insurance companies and some of the other major categories -- I mean none of the major category has any supply chain issues. So as we look at all of our big categories, the top 10, all of them are on screen now, and all of them have committed in the upfront market that we just completed.

Great. And when you last reported, you had highlighted improving cash burn, which is now expected to be about $9 million to $12 million for 4Q. And you also expect positive free cash flow in 2022. So first, can you talk about the upfront/scatter mix as well as the regional and local mix that's built into achieving free cash flow, positive free cash flow in 2022?

Let me ask -- answer that in like a macro way, and then I'll turn it over to Ronnie for the specifics. So we typically look at an upfront to scatter mix of around 60% to 40% in terms of ad ratio. We expect it will be comparable to that going forward next year. We do believe that our national business will be a higher percentage than our local business. The one thing that I would say going back to the supply chain comment, is some of our local companies have been more affected by supply chain issues than national ones. So generally higher mix of national versus local than normal and close to where we'll be on the 60-40 upfront to scatter. Did you have a question about cash flow there, too, Marlane? I didn't quite...

I was just framing it within that context and kind of what's baked into -- because you're seeing an improving trend in 4Q, you're looking to be positive next year. So just thinking about what's baked into that forecast.

Do you want to talk a little bit, Ronnie, about -- by the way, Ronnie is our new CFO, if you haven't met him, I think he's 2 months old, big add to our team. So excited. Do you want to talk a little bit, Ronnie, about some assumptions that we have?

Yes. So like you said before, on our third quarter's earnings call, we did guide to fourth quarter being EBITDA positive. And then also cash burn about $3 million to $4 million per month in the fourth quarter. And quite frankly, baked into those assumptions are in terms of the mix between upfront and scatter for most of this year for 2021, it's been mostly a scatter-driven story, just given the fact that we did not have the ability to sell into the upfront going into this year, given what happened, in particular, in the theater business towards the end of last year. So just simply by the business kind of returning here in the fourth quarter, further management of costs, and managing working capital, we think we can take that burn rate down to that $3 million to $4 million per month. Now going into next year, the assumptions around getting to positive free cash flow, it's very similar to what Tom said in terms of the upfront scatter mix kind of returning close to what historically it's been, which is about a 60-40 split.

Great. And then you touched on a topic, Ronnie, regarding -- you talked about positive EBITDA in 4Q on the last earnings call. And I mean, typically, 4Q is a seasonally strong cash flow quarter for you guys. So just kind of can you parse out some of the other drivers to kind of -- your positive outlook for EBITDA in the fourth quarter outside of the seasonal trend?

Yes. I think, again, you're right. A lot of this is that the fourth quarter has been strong. But I will tell you that for most of the COVID period following what traditionally happens seasonally, obviously, didn't really get to transpire. But I think a lot of what we've seen ever since the Labor Day weekend, kind of the positive momentum and advertisers taking note of that is driving a lot of what we're doing here in the fourth quarter, kind of that top line rebound. And then also, at the same time, we talked about core -- our run rate core operating expenses being about $6 million per month versus pre-COVID, which was about $9 million. So a lot of that is also bearing fruit here in the fourth quarter as we look to positive EBITDA in this period.

Great. And then Tom touched on this a bit [ or you, Ronnie ], but upfront national bookings, you'd mentioned about 75% of 2019 levels, which is higher than usual. So again, can you talk about some of those drivers and how that will normalize as you get back to more of a 60-40 next year? And then any similar commentary on scatter, can you remind us -- and I apologize if I've missed this, how that's trending versus '19?

I'll take that one first, Ronnie. So at the end of the day, the real mix between upfront and scatter driven by upfront being just stronger. The scatter market is still a little bit soft right now. We're much more of a focused upfront company to lay that foundation. So the real difference in the percentage in terms of improving and moving more towards upfront is really actually less scatter more than anything. So obviously, we're still going to need a good scatter business to even things out this year. But we're very happy with the upfront at 75%. Most people are forecasting the entire box office being around 75% to 80% next year. So we feel like we're right on the mark in terms of what the expected size of the attendance is going to be as it correlates back to where we're tracking versus 2019.

Great. And can you discuss pricing trends that you're seeing in both upfront and scatter? So for example, are you seeing any benefit from a very concentrated strong film slate right now?

Yes. So I think the best way to look at the market is the long-term pricing because scatter moves around every day, every week. But if you look at how we performed on the upfront, we are basically at the same CPM levels that we were at in 2019, which is very encouraging. I was a little cautious and concerned that maybe we might have to provide a little more of a discount, but that didn't come to fruition so we're quite happy about that. On scatter market, honestly, week-to-week, day-to-day, the scatter market can be really strong or actually really weak, which is driving pricing. So I'd say the scatter market is probably a little softer than we would like it to be at the end of the year, but it's still good and there's still 4 weeks left to go in the year.

Great. And just to confirm, Tom, you mentioned the CPMs are up versus '20. And did you say they're on par with '19?

I would say they're comparable, yes, on the upfront side, yes.

Comparable. Okay. Great. And in terms of digital ads, are you seeing any impact there on bookings, positive impact? Are you bringing in any new business? Just any commentary there about that initiative overall?

Well, ironically, we started building a digital platform of our own, both through apps and for destination-based websites. And during the COVID year in the last 16 months, we were driving digital ad sales every month, even in -- even when the theaters were closed. So the notion of diversifying to add digital revenue has been an important one. And we're really pleased with that business. In fact, that's been a positive business from an EBITDA point of view all the way through COVID. And we've grown that business really nicely. We're also adding a data business to our company. We believe within -- by the end of the year, we'll be the largest data provider of cinema advertisers to the Millennial and Gen Z audience. We know that will be very monetizable and effective thing that people are going to want to buy. So thank God, we are building digital long before COVID struck because it gave us a little bit of a cushion for our advertisers. We converted a lot of what would have been big screen advertisers into digital when the theaters were closed. And I think I would not have to worry about that anymore. But we're going to look to drive even more digital business in '22.

Great. And kind of moving on, can you discuss your liquidity position and how we should think about the runway given your improving cash burn rate?

Do you want to take that one, Ronnie?

Yes. So again, we finished the third quarter with about $64.4 million of cash at LLC. And we add about $7 million on top of that. That's really kind of gets you to kind of that $72 million or so or $71 million, $72 million of total liquidity. We actually -- in terms of our cash position, we actually improved from that, and we're definitely -- we're higher as of today compared to that $64.4 million. So again, that reflects kind of our management of not only the expenses of the business but also working capital as well. And we actually are in [ pacing ] kind of better than what we anticipated to be in terms of where our liquidity position is. So we are encouraged by that and believe that we have more than ample enough liquidity to guide us into next year. In addition, like we said on the call, we also have the Inc to LLC loan agreements pretty much in place but not executed just yet. And part of the reason for not executing on that is now we have been doing much better in terms of liquidity here within the business. So -- and in addition, we are -- as we also stated on the call that we are looking to get an amendment in a third-party facility in place prior to the Christmas holidays, and we're looking to continue to get that done, which that facility will likely be larger than the original size of the Inc to LLC facility. So all of that put together is we feel very comfortable with our liquidity position as we go into 2022 and build back up working capital.

Great. Thank you, Ronnie. Actually, that was -- you pretty much touched on my next question, which were -- which is some of the levers that you have to pull and certain different paths to improving your cash and liquidity position. You touched on the covenant waiver, any additional sources. But I was also just curious, too, about any comments in terms of support from your parent company in this in terms of your liquidity.

Yes. I think when we have shown and also demonstrated is that, again, the Inc shareholders are willing to provide credit support or liquidity, if needed, right? I mean it was definitely demonstrated back in -- at the end of the second quarter when the company -- when we announced that there would be a facility that would be put in place. And again, here, where we're sitting because is that agreement or that credit agreement or a loan agreement for that facility is pretty much done. And so even though we look to put in a third-party facility, which will replace the Inc facility in a sense where the Inc facility won't be put in place once we have the third-party facility. That's still another additional place of potential support in liquidity where basically Inc could provide.

Great. Thank you, Ronnie. And just a couple of high-level questions to wrap it up here. So one, what are the best opportunities you have to capture ad spend? Is it versus television? Is it kind of working on and parlaying your favorable demographic? Can you just talk about that and any opportunities that are out there to take share?

Yes. So I think -- starting with the demographic is nothing is more valuable than the Gen Z and the Millennial audience that we deliver on. So there's really no better way with the exception of maybe going on to Facebook or on some of the digital platforms for reaching that coveted audience. And the reason for that is that television by -- for the most part, there is no young audience left on television. And we have benefited tremendously from the erosion, the really rapid and significant erosion of cable and network TV in terms of delivering a young demographic. We've always been competitive with television as our primary source. But right now, with television just eroding rapidly and much of that going into the Avon world, we're taking a significant amount of share from television and moving it into this coveted movie screen. I mean, ironically, one of the few places that you really have to watch your commercial these days is if you're in a movie theater and that big screen like sub with an ad, you're going to watch it, and it's impossible to click off. So we feel we have a real benefit from that as well as the delivery we have against young people who are very coveted and hard to reach these days. And we know how easy it is to click a digital ad off. And we know that a lot of those young people are not watching traditional television anymore, many of them are the first cord cutters. So we're in a good place right now, and we're really excited about the movie slate for '22, which looks really strong as well as the end of the fourth quarter.

Great. Tom, any -- speaking of '22, any update on the first half '22 movie slate? Anything new regarding maybe movies being pushed forward perhaps?

Right. Well, right now, the movie slate is loaded for next year. I mean I've been doing this for almost 30 years, but as a studio executive and on the other side, I've really never seen a slate as good as this in a very long time. Every major franchise has a movie coming out next year and then you have some just incredible movies like Top Gun and Avatar and others. And I think those are all going to deliver. So I look at this as really being an opportunity to get everybody back into the theaters. We're optimistic that many of the months of 2022 could look like 2019. I'm not saying the full year will. But I think even when you see Spider-Man opening in 2 weeks, you're going to see that perform very much like a traditional 2019 movie. So look, it's been a cold long 18 months. We are so happy to have people back in theaters and having the support of our advertisers as well has been a real change given what we've endured for almost 20 months.

Great. And last question from me. The new COVID variant is a recent development. Obviously, there's headlines around it. But any thoughts or potential impact to the business? And how do you think about it now versus a year ago?

Well, listen, we haven't gotten literally one call from an advertiser yet regarding the new variant. And I do think there was a bit of overreaction from the national media on this. Right now, we have people locked into the upfront. We haven't really had an ad about it. So I think it is a natural thing to ask about in any business. But I think most people realize that it hasn't hit the U.S. yet, if it does at all. And most people believe with the mask mandates and the vaccine mandates as we have in California and New York, the movie theaters are still going to be a very safe place to go to see content. So fingers crossed. I'm sure it won't be the next -- it won't be the last variant, but I am hoping that this is one of the few things that just kind of blows over and doesn't affect our business.

Great. Well, Tom, Ronnie, that's all I have in terms of questions. And I want to thank you again for joining us today.

All right. We're happy to be here, and thank you for inviting us and look forward to getting back to Florida in person, hopefully next year.

Definitely. Thank you.

Thank you. All right. Bye-bye.