National CineMedia, Inc. (NCMI) Q1 2012 Earnings Report, Transcript and Summary

Greetings, and welcome to the National CineMedia, Inc. First Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Oddo, Vice President of Finance for National CineMedia, Inc. Thank you. Mr. Oddo, you may begin.

Good afternoon. I'd like to remind our listeners that this conference call contains forward-looking statements within the meaning of Section 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. Now I'll turn the call over to Kurt Hall, CEO of National CineMedia.

Thanks, David. Good afternoon, everyone. Welcome and thanks for joining us for our 2012 Q1 earnings conference call. Today, I'll provide a brief review of our Q1 results and make some comments about the rest of the year. Gary Ferrera, our CFO, will then provide a more detailed discussion of our financial performance and guidance. And then as always, we'll open the lines of questions. Once again we exceeded the top end of our adjusted EBITDA guidance range with solid 12% revenue growth and adjusted OIBDA growth of over 5% versus Q1 2011 despite a contractual increases in our Q1 theater access fees with our founding member theater circuits that happens every 5 years. Our National Advertising business had a great quarter with revenue growth, excluding beverage, of over 19%, driven primarily by a 540-basis-point utilization increase to 76.4%, which was on top of a significant network attendance increase of 27% related to a very strong box office and continued addition of new network affiliates. These gains were partially offset by lower average national CPMs and lower regional revenue. The increase in national utilization and decrease in CPMs were driven by our strategy to create more flexible pricing structures during lower-demand months and by some pre-bookings during our soft Q4 2011 scatter environment. The new pricing structures included providing incentives for new clients to test cinema or existing clients to move or expand their spending into lower-demand months. We also continue to expand our relationship base of more price-sensitive brands through airplane or other creative deal structures, which as expected, negatively impacted our Q1 CPMs. From the beginning of our growth strategy, it's always been about growing utilization, so that we can begin to benefit from a more favorable inventory, supply and demand relationship. While we have made significant progress…

Thank you, Kurt. For the first quarter, our total revenue increased 11.7% to $79.1 million, driven by a 12.2% increase in total advertising revenue including beverage, and a 9.4% increase in Fathom Events revenue. Total Q1 adjusted OIBDA increased 5.1% to $24.8 million from $23.6 million, and our first quarter adjusted OIBDA margin decreased to 31.4% from 33.3% in Q1 2011. This margin decreases primarily due to the impact of the contracted 8% increase in 2012. The attendance-based portion of our theater access fee that occurs once every 5 years and the incremental digital cinema maintenance fee related to the increase in the number of high-quality digital cinema projectors connected to our network. Additionally, our margins were impacted slightly by the fact that our lower margin network affiliate attendance base that operates under our revenue share model grew to 15.6% of our total Q1 attendance versus 11.2% in Q1 2011. Our Q1 2012 advertising revenue mix shifted slightly, and was 63% national, 20% local, and 17% beverage versus Q1 2011, which was 64%, 22% and 14%, respectively. Q1 National Ad revenue, excluding beverage, increased 19.1% to $45.6 million driven by an increase in utilization to 76.4% compared to 71% in Q1 2011 across a 26.9% increase in our Q1 attendance base. This increase was driven by the very strong box office, as well as the addition of several new network affiliates over the past year. These increases were partially offset by a CPM decrease of 11.5%. As Kurt mentioned, this decrease was primarily due to more aggressive pricing strategy designed to drive utilization during typical low-utilization time periods. Our Q1 beverage revenue increased 19.5% to $9.8 million, driven by the significant increase in founding member attendance and the approximately 1% beverage CPM rates increase for 2012. The impact on OIBDA…

[Operator Instructions] Our first question comes from the line of Townsend Buckles, JPMorgan.

If you could give some more color on what you're seeing in the ad market, we've been hearing pretty consistently from the cable networks, the scatter trends have actually been pretty good, including Viacom and Scripps this morning. So would you say it's your particular advertiser base at this point back or anything else that is more unique for you, or just anything that can help us frame the situation you're saying?

I think its 2 things. I think first of all, a lot of those networks when they talk about the scatter being okay are not talking about having to sell much inventory because their Upfronts were so big. And while there's been some networks that have experienced some upfront cancellations, it's still -- the upfront was so big last year that most of those networks were sitting pretty well before the scatter even started. So that's part of it. The other part of it, a lot of the cable networks, Scripps in particular that you're talking about, deal in a very low CPM marketplace, single digit to low-double digits. That's clearly not the marketplace that we deal in. Our marketplace is more a primetime sports, special event stuff, whether it be the Super Bowl or Academy Awards or whatever, where most of the higher CPM television is spent. And so I think the cable networks are doing fine because they're obviously selling at a much lower CPM.

And, Kurt, looking at your guidance for the quarter, May and June are clearly the big months. Can you give us a sense of how much is booked at this point as we think about maybe some improvement into the summer blockbuster season?

Well, I can't -- that's not information we've given before, but I can tell you we have a pretty good handle on what we -- where we think the numbers are going to come out. The only sort of wildcard or what we talked about in our comments is that there has been a bunch of money that's been pushed back into the marketplace with some of the categories that are pretty good for us, car manufacturers, in particular. There was a lot of articles written last few months about GM taking back a lot of their money and so on. So could there be some last minute deals later this month or into June? Yes, of course. And as we talked about before, it doesn't take too many things to turn the dial for us. 1 or 2 big deals could make the difference. We've always had the -- we've always approached this guidance thing on a pretty conservative basis, and we continue to do that.

Our next question comes from the line of Barton Crockett with Lazard Capital Markets.

I guess I wanted to drill down a little bit on that new view for the second quarter, which -- coming out of the fourth quarter call, how you guys have highlighted Q2 and Q4 as likely the best growth quarters of the year. Now Q2 seems like the opposite of that one, the weaker gross quarter of the year. Was it really just this regional kind of money that moved out of local that drove it? Still a little bit more color on what changed from what you saw on the fourth quarter to the second quarter. And if that says anything about your ability to kind of predict the balance of the year.

Well, when we were budgeting and when we were giving our guidance, it did look like second quarter was going to be a stronger quarter. We did have a few things move, as I mentioned, move into third quarter and fourth quarter, so that clearly hurt us. But the market, if you looked at our bookings week by week, which we've analyzed pretty closely, week 7 through 16, for whatever reason, went very, very dry. When we booked less than half, almost 1/3 in some cases, of what we have booked in previous years, we looked at 2011, 2010 for the same time period. So that was clearly a significant de-acceleration in the marketplace for second quarter around that week 7 through 16, which, by the way, was right around the time after we had given guidance. So that's slow down obviously is what we are seeing now, what we're reflecting in our guidance. And as far as our ability to continue to predict, it's always a little bit of a tough game going into a new year. And obviously, our comments where we thought Q2 would be a little stronger than it was were probably a little premature.

And, Barton, in Q2, our local business is trending well. So far, it's sort of -- as Kurt mentioned in his script, somewhat reversed from...

Yes. And the other thing you got to consider, Q3 is such a big quarter for us historically, especially the last 2 years. Going into any one year, it's very difficult for us to budget Q3 aggressively because our utilizations are so high and it makes it just more difficult. It's sort of a law of numbers. But what we continue to see is that our business, especially in July and August and even in September now, the utilizations are all significantly close, if not, over sellout levels and at very high CPMs. So if we continue to build demand in other quarters like we've done in the third quarter, that would obviously help our business, and it's something that we're focused on. But as it stands right now, third quarter once again, and this will be for the third year in a row, looks to be, by far, the best quarter of the year.

Our next question comes from the line of Eric Handler with MKM Partners.

A few questions for you. First, when you look at the first quarter and just try and dig in to your new strategy little bit, could you give us a sense of how many advertisers, particularly new advertisers you had in this year's first quarter versus last year's? And then secondly, as we look at the second quarter, how should we think about utilization versus price relative to last year? And then last, the third quarter of this year, we're going to have the Olympics, obviously a big event, is that a competitive factor for you guys at all?

Yes, let me answer the last one first. The only thing we could see that was impacting us in the Olympics is that GM is a big Olympic sponsor. And so our standing with GM this year has not been as strong as it was last year, although some of the import autos and Chrysler more than picked up the slack there. So our overall spending in the auto category is still very, very strong, albeit a little bit less with GM because of their Olympic commitment. They're sponsors, as you probably know. So that -- I think that's the only thing I can really point to that I can see some Olympic impact. Clearly, the various networks of NBC and Comcast or 6 or 7 or 8 of them that are going to have Olympic programming are going to be pretty full the last week of July and into August. Could that be some of what's going on and why we're seeing our third quarter business pickup? Maybe because there's overflow. And that's being compounded by the election impact, because a lot of -- there's going to be a lot of inventory that's going to be sucked up by the elections in that September, October timeframe. So all of those are sort of potentially contributing to what we're seeing in the third quarter. As far as the first quarter and some of the things that we've been doing, approximately 18% or so of our dollars were really related to the lower, what I would call, either opportunistic or airplane-type structures that we are going after in the first quarter. So that's really what drove some of the CPM decline. There were a couple of deals that we took last year when the market was a little soft in the fourth quarter that we took for first quarter, where the pricing was a bit lower. But the primary impact, as I said, was really around our strategy to try to build utilization. Eric, was there another part of your question there?

Yes, in 2Q, how should we think about utilization and price relative to last year?

Price, I don't think it's going to be the issue in Q2. I think it's primarily utilization, and just the fact that we had some units that moved on us and we just haven't seen the movement in the scatter market that we would like.

Our next question comes from the line of Anthony DiClemente with Barclays Capital.

This is actually Bo Tang in for Anthony. I was hoping to get some more color on what's embedded in your full year guidance. Do you still see CPMs flat for the year?

Yes, I don't think we're prepared to necessarily change that. Clearly the CPMs are lower in the first quarter. But a lot of the type of deals that we took in the first quarter, we're just not going to take the rest of the year because we've got the demand that we need in those months to push the supply demand economics when we need them. The only exemption to that may be October. Although this October, we could see a bit of an anomaly just because of the pressure from the elections. I suspect that's where most of the money is going to be spent. And so that could actually impact an otherwise weak month for us. And that could be some positive upside. So we haven't really changed as we said in our overall outlook. We really haven't changed the dynamic much between utilization and CPM.

And then -- and also given the favorable backdrop that we have for M&A as film prints become less prevalent, could you talk about maybe the impact of this since some of your founding partners could be the ones that are driving some of those M&A?

Well, obviously, our deal with the founding members would lead me to want them to be the winner in the M&A game. But that's not -- we have several very good relationships now with network affiliates that could also participate in some of the M&A that's going on out there. I do suspect that this will be a fairly active period over the next year to 18 months. There seems to be a little more incentive on the part of sellers either because of the digital cinema thing that you mentioned or because they're owned by private equity companies that have owned them for many, many years. So I think those incentives, if you will, I think will create less of a gap between the bid and asked because maybe you've seen over the last couple of years, which could promote more deals to actually get done. And so we'll see where it goes. And there's a likely chance that it could go positive ROA. But there's also some circuits out there that we would like to get at or currently have that could go the other way.

Our next question comes from the line of James Marsh with... [Technical Difficulty]

Just a follow-up on that M&A. Can you just kind of remind us what circuits are in play, either coming off your contracts or coming off your competitor's contracts? And related to that, maybe you can discuss the Screenvision -- or pardon me, the Clearview circuit that Cablevision said they're going to put on the block. Just kind of frame out that opportunity, maybe how many screens or attendance for that circuit?

Yes, the Clearview thing, it's not in our network. In fact, I think in over the last 6 months or so, they've actually renewed with Screenvision. So clearly, there's no downside risk for us if that trades. It's obviously primarily a New York asset, so I suspect it's going to be looked at by virtually all the theater circuits that are interested in buying theaters. So although they are smaller theaters, sort of suburban theaters, if you will, not the sort of [indiscernible] theaters predominantly. I think that will be an asset to people who look at it pretty closely. They do have the Ziegfeld and a few other big theaters in New York. So anyway, that's on that. The only other one that I'm aware of that -- where there's actually a book out there is with respect to a piece of the Rave circuit, the piece that was owned by Boston Ventures or is owned by Boston ventures. And I suspect that that's a pretty good quality asset, and I suspect that a lot of people will be looking at that as well. That is also currently done by Screenvision. So that's -- I mean those are the ones that I'm aware of. There's lots of rumors floating around about other circuits that could go for sale. I'd rater not comment on those because at this point I don't think there's any specific book out there.

And from our side, there's really nothing coming up in 2012 that I can think of off the top of my head.

Yes. We have one circuit that comes up in '13, 1 or 2.

Okay. And then just one quick follow-up. I was hoping to get a sense or view if the competitive environment with Screenvision is changed since management -- or I guess the ownership changed there. The main story there, are things settled down a little bit in your mind.

I think there's certain parts of it that have settled down. I think on the issue of CPM, it's probably about the same. There seems to be an evolving view by the marketplace that we sell at a CPM premium to them. And that just seems to be the way the marketplace is sort of settling out. There are several initiatives that -- we continue to talk to Travis and the rest of the management there about doing together things like common research, putting data into the marketplace about who buys cinema, what kind of brands, what kind of categories and so on that the previous management we weren't making a whole lot of progress with. But these are things that are good for the overall business, both theirs and ours and are clearly noncompetitive type of things. So I'm really happy with the way that we've been working with them on that stuff. And so I would say that it's marginally better. I don't think it's impacted the marketplace all that much, but I think because we know the guys there, they're obviously owned by some very savvy, very good media investors, I think all that's positive for the business.

Our next question comes from the line of Ben Mogil with Stifel, Nicolaus.

So in terms of looking and how we should be thinking about 2Q, should we be kind of thinking about it from the perspective that advertising is kind of flat and the decline in revenue on a year-over-year basis is really meeting [indiscernible] Fathom just because of the unwinding? Is that the right way to think about the revenue conclusion?

Yes. Clearly, what we said, Ben, is that our local business seems to be doing quite a bit better than it did in the first quarter. So I don't think that's going to be the issue in the second quarter. I made a comment about there being a tough comp on Fathom, so there could be a little bit of downside on that, although that doesn't affect our OIBDA all that much because the margins on Fathom are quite a bit lower. It really focuses around our national business. And as we've talked about a lot, there's a lot more volatility in the international business to the loss or the gain, whatever the case may be, of 2 to 3 contracts. And that's always the case with our second quarter. One of those swing quarters, where April and May can go either way. June is usually a very, very strong month. April and May are kind of the -- April for sure are the swing month in that quarter. And it really all is around the National Advertising.

And then, Gary, just want to make sure I got a couple of comments from you correct in my notes. I've got you saying that right now, your 3Q bookings were up around $10 million against what they were out last year, is that correct?

Yes.

And you're 64% sold now against the midpoint of guidance, which is about flat with last year at this time, is that right?

No, it's for the year.

For the year, I think. Well, there were 2 comments he made. He made a comment about where we were booked around the year, so I think it was the 64%...

64% versus 77%.

And there was a comment about third quarter. I think the key element of third quarter is the fact that on a dollar basis, we're up 20% right now. That $10 million that you referred to, Ben, would equate to a 20% increase. And that's what's implicit in our guidance. We obviously have not given third quarter guidance yet. But if you look at what our guidance is for the year and what we have in there for the third quarter, that would be what would open it.

Okay, that's great. And then just one last one for me. On all the refinancing, excluding the charge that you'll take just for unwinding the swaps, is $17 million of interest expense on a quarterly basis a good run rate starting in the second quarter?

Starting in the -- it's probably going to be around $54 million a year of actual cash.

Okay, I got those looking at from a GAAP perspective.

Well, GAAP's got a lot of other stuff in it. So I hate to try to get there right now. But the actual real interest expense is going to be approximately $54 million, $55 million.

Yes, other than the charge we're taking in the second quarter for the unwind of the swaps, which, I guess, we gave some guidance on...

You got accretion of the taxes in there and everything else.

25% to 30%, yes. But you've got -- the number that's in the first quarter, if you take out that swap number, is probably not for GAAP basis, not that far off. You can have a little more -- a little tiny bit more interest, but not that much because the swap goes away.

[Operator Instructions] Our next question comes from the line of Ben Swinburne with Morgan Stanley.

Gary, did you give the CPM decline in the quarter? It looked like it was like high singles, is that about right?

It was 11.5%.

11.5%.

Got it, okay. And then, Kurt, on the Upfront, your Upfront is coming up here. I was wondering, what's the early feedback from particularly the ad buyers. I know you've talked over the years about sort of getting these folks onboard, getting more TV people instead of out-of-home. I don't know if you have a target ratio of out-of-home versus TV buyers for this event or not, but if you'd want to share with us, I'm just curious even qualitatively baking heading into it?

Yes, it's probably going to be around 50:50. I mean that's about -- if you look at where we get bought now, we're give or take 50:50 out-of-television shop versus out-of-home shops. So I would expect that to be the audience somewhat. Now we would hope to get a few more television guys, but that's a busy week. And that's always been a challenge, it's finding a spot in the busy week. And it happens to be May 16 the one that we picked, which is sort of squeezed between, I think, Turner in the morning and CBS in the afternoon. And so we're hoping people would stop by for lunch. We're serving them a nice lunch. So I think it will be about 50:50, but we are hoping to get more people there from television. Our meetings so far have been very, very well received. I think initially, I think people scratched their heads and said, "Why does cinema need to be part of this?" Maybe somewhat similar to the way the video guys have become a part of it, online video guys have become part of it with their new front deal they did a few weeks ago. And I think a lot of that is just that media buyers are just getting overwhelmed in some respects by the number of things that they have to do during the pretty short upfront period. And so I think the whole overall media marketplace just has to start to absorb or digest all of these new people that they need to talk to during this upfront season. As we indicated, we've had well over 100 meetings already with both clients and agencies. The feedback has been very good. I think from my standpoint, this was a no-brainer, it's going to cost us very, very little to put the meeting on. We're doing it in the AMC theater, on the West Side, so that's obviously not costing us as much. And so if we landed one incremental deal from this whole exercise, it pays for the meeting 5x to 10x over. So it's really an opportunity for us to introduce or reintroduce ourself to the marketplace and make people understand that when you look at our size now, depending on whether you want to say Friday and Saturday, we're Number 1 network in the country on those 2 days. And we're clearly in the top 5 or top 10 depending on the month, the rest of the year, if you include all days of the week. So it's time for us. We're sort of sticking up our flag in the ground and making a statement and getting people to notice us.

And then just switching back to the guidance for the year, it sounds like 2Q, you got great visibility at this point, and Q3 is a big quarter seasonally for you guys. Q4 you have a pretty easy comp from last year. So I mean is it -- would you describe the full year guidance even though it implies I think 10% growth in the back half as relatively low risk?

Yes, I mean we're going to have grown -- depending which end of the guidance in Q2 you want to take. We're going to have grown the business 2% to 9% in the first half. And second half is always a bigger half for us. We've got a lot more impressions to sell because of all our new affiliate agreements. Second half will benefit more from that because there's more demand in the second half. Fourth quarter, my sense is that there's not going to be as much money placed, at least in our world, in the Upfront. I think some of the cheaper cable networks will probably do very, very well in the Upfront. There's clearly a dance going on right now, as there is every year. My sense is there's a little bit -- or quite a bit more buyers' remorse going on right now about what happened in last year's Upfront than this year. And the leverage or the pressure on inventory is not going to be as high this year, and you're not going to see the kind of dollar increases and/or CPM increases that you saw last year. And so what happened last year, there was just so much money that got committed to the Upfront that fourth quarter, which is the first quarter of the period, and it's all firm money, left us pretty high and dry, especially when the whole market turned around in July and August. So our anticipation is that October will be a little bit stronger month because of the political pressure on the marketplace and all that money, and that there will probably be more money in the scatter market because there's not going to be quite as much committed Upfront as there was last year. That's sort of our thesis. And then obviously it goes into next year's first and second quarter as well. I mean, it's always a little bit better for us if there's not as much money committed in the Upfront.

Our next question comes from the line of Jim Goss with Barrington Research.

It seemed though from your earlier comments that you're getting a little more increasingly positive on Fathom as a bit of growth element even though it's still very small obviously, and that's aside from backing off from the business meetings. Is that a correct assumption? And how do you see that scaling over the next couple of years?

Well, we clearly see this business as growing on mathematical percentage basis, faster than our ad business. And a lot of that is obviously just the law of numbers. It's a smaller business. It's much earlier in its development cycle than our advertising business. And it's more of a startup, if you will, and it's still a developing business. So your observation on its growth is obviously correct. I've said this in the past. If we could get this business to 10% or 15% of our overall revenue and 5% to 10% of our overall cash flow over the next few years, I think that would be a very good outcome. So yes, it's going to be incremental, but it's still not got the upside potential of our advertising business. I mean the whole cash flow of the Fathom division is the equivalent of 3 incremental ads in our advertising business. Now having said that, from a strategic standpoint, it continues to be very important for the theater circuits because it does provide incremental bodies, incremental concessions, sales and so on. And the other part of the business that could actually provide more upside than I've indicated here in my first comments was around the sponsorship business and cost-marketing relationships that lead to incremental dollars for us. So there could be -- there is a very strategic connection with that business with our overall advertising business. So that's -- for us, that's one of the reasons that I had thought that made so much sense being a part of our business.

Are you tied into this incremental or this initiative, the big change announced at CinemaCon last week?

DCDC?

Yes.

Yes, we are.

[indiscernible]part of yours.

Yes, we have been involved with them from a technology standpoint. And if you step back and look at DCDC, it has a lot of the same characteristics of the network that we currently have. Obviously the bandwidth would be significantly bigger, and we plan to use the DCDC network just the way we do -- we use the Hughes Network that we have today. From my standpoint, it's just a, hopefully, more efficient way of getting our ads to the theaters. Today, we use one satellite network. In the future we're going to use another. So we want to make sure that it does everything that we need it to do. So we've obviously been involved with the 3 circuits in some of the technology considerations and with the studios that are involved.

Okay. One other thing, a separate issue. Are there any -- are there restrictions once groups change hands in terms of relationships with you versus Screenvision depending on who owns the theater groups?

Not really. Generally, the relationships that theater circuits have with either us or Screenvision are exclusive to us or Screenvision. And that sort of have to be that way because of the way the advertising business works. But -- and the deals that we have with everybody, except the 3 big circuits, our revenue share deal that generally rotate around the 50:50 REVshare. So those are the sort of the parameters of that part of our business.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Thank you very much, everyone, for joining us today. And, as always, if there are any follow up questions, please call Gary, David or myself. And hopefully, we'll be talking to you soon. Thank you very much for your support.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.