National CineMedia, Inc. (NCMI) Q1 2017 Earnings Report, Transcript and Summary

Welcome to National CineMedia First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I would now like to turn the conference over to your host, Katie Scherping, Chief Financial Officer for National CineMedia. Thank you. You may begin.

Thanks, David. Good afternoon, everyone. I would 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. Further, our discussion today includes some non-GAAP financial measures. In accordance with Regulation G, we have reconciled these amounts back to the closest GAAP basis measurement. These reconciliations can be found at the end of today’s earnings release, which maybe found on the investor page of our website at www.ncm.com. Now with that, I’ll turn the call over to Andy England, CEO of National CineMedia.

Thanks, Katie. Good afternoon, everyone. Welcome and thank you for joining us for our first quarter 2017 earnings call. During this call, I will spend a few minutes highlighting the Company’s first quarter 2017 results, and Katie will then provide a more detailed discussion of financial performance for Q1, as well as guidance for 2017. And then as always, we will open the line for questions. As we noted on the last call in late February we were experiencing a slow scatter market as available dollars gravitated to large established reach vehicles. This continues to play out for the full quarter and we're also seeing the softness continue into the second quarter. Total revenue for the first quarter decreased 5.6% to $71.9 million from $76.2 million in the first quarter of last year, due primarily to a decline in national sales revenue. Adjusted OIBDA also decreased 26.7% to $17.6 million for the first quarter of 2017 from $24 million for the first quarter of 2016. In addition to our national sales team experiencing a thin scatter market, there was a shift in overall ad spending, including a decrease in NCM's two largest advertizing categories automotive and entertainment which were down 15% year-over-year. As a result our national advertising revenue was down 11.6% to $44.4 million in Q1 of 2017, compared to $50.2 million in Q1 of 2016. The year-over-year decrease was driven by 13.7% decrease in national advertising CPMs, a result of the timing and mix of content partner and other upfront commitments year-over-year in conjunction with the soft scatter market, which resulted in a 1.3% decline in impressions sold partially – impressions sold partially offset by an increase in other revenue. Our local and regional advertising team felt better, however, as advertising revenue on that side of the business was up in first quarter by 1.6% to $19.1 million over $18.8 million Q1 of 2016. We also continue to benefit from a strategy of competing for National Spot TV budgets by the inclusion of NCM into the STRATA planning and buying system and put one of the key sales executives in charge of our emerging National Spot business. As you may have seen in our announcement yesterday, we just reached an agreement to become part of the Media Ocean system which is the leading software planning and buying platform for the advertising world. And we expect to start seeing benefits from the visibility and NCMI have been part of the Media Ocean platform beginning in late Q4. Media Ocean’s open cross-media platforms power $130 billion in global media budgets and serves more than 80,000 users across an agency, advertises, broadcaster and publishers worldwide, which makes it a great place for NCM to be to capture some of those ad dollars from smart television. Our digital sales team also had a strong Q1, up 35% year-over-year, which only strengthens our belief that making digital an increasingly important part of that business strategy for the future will pay off as we create new ways to reach movie audiences wherever they may be. We also continue to expand and diversify our client base in Q1. And top categories included broadcast TV, prepared foods, personal care products, colleges and universities and insurance. While our advertising business continues to be more unpredictable than I would like on a quarter-to-quarter basis as this first quarter illustrates, I continue to believe that NCM’s combination of broad national reach engage millennial and Gen-C movie audiences, high quality Hollywood event programming and high impact viewable impressions positions us very well for the future. As you know, our national pre-show inventory is sold through the scatter market, content partnerships and other upfront commitments. We look forward to once again taking our place among the top national video networks to present NCM’s 6th Annual Upfront Luncheon Event in New York City's AMC Loews Lincoln Square on May 17, to showcase the best of the big screen to the media buying community. We will be introducing a new Chief Revenue Officer, Scott Felenstein, who just joined us from Discovery Communications and plan to make some exciting announcements. So be sure to stay tuned. We also made great strides in growing our NCM network in Q1, led by out Affiliate Partnership team. Our relationships with our exhibitors were a key focus on that business and fundamental to continuing to grow the number of impressions we have available to sell for advertisers. As we announced in March, we strengthened that network with the addition of five new affiliate partners having 71 new theaters, 533 screens and approximately 20 million attendees to our national theater network, enabling us to better compete in the Board of Premium Video Marketplace. On the outcome of the DOJ Final Order regarding AMC’s acquisition of Carmike resulted in the transfer of 17 theaters with 9.5 million attendees from NCM to another cinema advertising provider, we have already more than made up for it with new affiliate partnership agreements with top theater circuits including Bow Tie Cinemas, Cinergy Entertainment and Main Street Theatres, resulting in the movement of 54 theaters and 10 million attendees to NCM, as well as an additional 17 theaters and 10 million new attendees joining us from Megaplex Theatres, a major exhibitor which had previously sold their own National advertising in-house. It’s gratifying to see exhibitor partners exhibited partners like these who had previously worked with another network recognize the value of becoming part of the number one millennial network in the U.S. And we are proud to welcome them aboard as exclusive affiliate partners. And finally we continue to invest in the business as part of our plan to accelerate the timeline to complete our new CRM system, sales proposal and inventory management systems, as well as further the development of new audience targeting systems and data management platforms. The integration of several of these improved systems with that digital distribution network will allow for the further shorting of campaign lead times and provide more targeted and efficient campaigns with detailed reporting to clients, which is essential in today's advertising marketplace. As discussed on our February call, 2017 will be a transitional year for NCM as we evolve from being a largest cinema network into a truly progressive integrated digital media company. The transition starts in our governance and ownership with the court ordered removal of AMC from our Board and the beginning of the sale of 30 million NCM shares from AMC to the public. It continues in the C-Suite, where we have recently hired Scott Felenstein from Discovery Communications as our Chief Revenue Officer, promoted Lawrence Snapp, who recently joined us from Microsoft as Chief Digital Officer, aligned end-to-end operations on the Adam Johnson and elevated our CIO, Chuck Frederick to our senior leadership team. This leadership team is making progress against our affiliate strategy with the recent addition of the new affiliates mentioned earlier. And new agreement with Media Ocean along with STRATA will enable us to tap into the huge pool of national spot TV dollars, as well as making it even easier to plan and buy our inventory. Q2 will see us upgrade our CRM system four levels and begin the process of full engagement from the team and using that important tool. In our upfront in two weeks we'll have several exciting announcements including the reinvention of the pre-show and the unveiling of a whole new approach to digital. We anticipate the first three quarters of 2017 will be challenging or Q4 enabled by content partner spending in Star Wars will be solid. We expect the value of that 2017 transition and investments will be reflected with meaningful activities and digital national spot sales stabilize network will continue to strength the films like beginning later this year and into next, will drive growth in 2018 and beyond. Now I will turn the call over to Katie to give you some more details about her Q1 2017 operating performance and color surrounding our 2017 operating performance and color surrounding our 2017 guidance estimates.

Thanks Andy. I’ll walk through the results that Andy highlighted in further detail, discuss our thoughts on the quarter and our outlook for the rest of the year and then we'll open the call for your questions. For the first quarter our total revenue decreased 5.6% versus Q1 2016, driven by 11.6% or $5.8 million decrease in national advertising revenue, partially offset by a 16.7% increase in beverage revenue and a 1.3% increase in local and regional advertising revenue. Total Q1 adjusted OIBDA decrease 26.7% or $6.4 million and adjusted OIBDA margins decreased to 24.5% from 31.5% versus Q1 2016. The margin reduction was driven by a decrease in higher margin national advertising revenue, higher theater access fees attributable to the contractual increase in 2017 of $900,000 in Q1 and $600,000 related to higher founding member attendance of 3.4%, as well a write-off of an investment of $1.4 million we obtained in prior years. Offsetting some of these expense increases was a decrease of about $800,000 in performance based bonus expense from the prior year due to the decreased financial performance in the quarter. Without the contractual increase in the theater access fees the investment write-off met with a bonus benefit, our adjusted operating expenses would have been $1.5 million lower. Recall, that in the first quarter of 2016 we incurred $2.9 million of cash administrative expenses and $2.3 million of non-cash stock compensation expense related to the departure of the former CEO which are both excluded from or adjusted OIBDA for our reporting purposes. Our Q1 2017 advertising revenue mix was 62% national, 26% local and regional, 12% beverage versus Q1 2016 that was 66%, 25% and 9% respectively. For the first quarter national ad revenue was $44.4 million a $5.8 million or 11.6% decrease versus Q1 2016, driven by a 13.7% in the CPM, a 1.3% decrease in impressions sold partially offset by some other revenue. Overall CPM decrease primarily due to the timing and mix of content partners and other upfront commitments year-over-year. In Q1 2016 we had one content partners spend $4.8 million that did not spend any money in Q1 2017, but we expect to see revenue from them later this year. In addition, as previously mentioned, we experienced general softness from the automobile and entertainment category and per our recent research report from Morgan Stanley two of the larger industries increasing ad spending in 2017 include the pharma industry, which is not a target for in-theater advertising and food beverage, including quick-serve restaurants, which we have a limited – which we have had limited advertising from in the past. The 1.3% decrease in impressions sold was driven by a decline in inventory utilization to 76.2% from 81.3% in Q1 2016, partially offset by a 5.3% increase in network attendance, propelled by a 17.5% increase in our affiliate attendance and the strong Q1 2017 box office overall, particularly in March, driven by the success of Beauty and the Beast. Finally, our quarter-end make good balance decreased to $200,000 at the end of Q1 2017, from $1.8 million at the end of Q1 2016. Q1 local and regional advertising revenue was $19.1 million, an increase of $300,000 or 1.6%, driven by an increase in digital sales and 5.3% increase in contract volume for contracts greater than $100,000. Q4 beverage revenue increased 16.7%, or $1.2 million versus Q1 2016, driven by a 10.2% increase in beverage CPM for 2017 and the 3.4% increase in founding member attendance compared to Q1 2016. Looking briefly at diluted earnings per share, for the first quarter we reported a GAAP gap diluted EPS loss of $0.08, versus a loss of $0.07 in Q1 2016. Adjusting for CEO transition related costs the GAAP diluted EPS loss for Q1 2017 and Q1 2016 would have been $0.08 and $0.05 respectively. Our capital expenditures were $3 million for the first quarter of 2017, compared to $4 million for Q1 of 2016. We estimate that our full-year 2017 capital expenditures will be in the $13 million to $14 million range or approximately 3% of revenue. Now moving on to our balance sheet. Our total debt outstanding at NCM LLC at the end of Q1 2017 was $950 million versus $955 million at the end of Q1 2016. Our revolver balance at the end of the quarter in 2017 with $30 million, compared to $85 million at the end of Q1 2016. Our average interest rate on all debt was approximately 5.1% at the end of Q1, including our $270 million floating rate term loan bank debt and revolving credit facility that had a rate of approximately 3%. Excluding revolver balance of 71% of our total debt outstanding at the end of Q1 2017 had a fixed interest rate. Our consolidated cash and investment balances as of Q1 2017 increased by approximately $7 million to $81 million from the end of Q1 2016 with $74 million of this balance at NCM Inc. We announced today that the Board of Directors had authorized the company's regular quarterly cash dividend of $0.22 per share of common stock. The dividend will be paid on June 1, 2017 to stockholders of record on May 18, 2017. We intend to pay regular quarterly dividend for the foreseeable future at the discretion of the Board of Directors consistent with our intention to distribute over time substantial portion of our free cash flow. The declaration, payment timing and amount of any future dividends payable will be of the sole discretion of the Board of Directors who will take into account general economic in advertising market business conditions, the company's financial condition, available cash, current and anticipated cash needs and any other factors that the Board of Directors considers relevant. Our annual dividend yield is currently 7.5% based on today's closing share price of $11.72. Our pro forma net senior secured leverage at NCM LLC as of the end of Q1 2017 was approximately 3.1 times trailing four quarter adjusted OIBDA, which is well below our senior secured leverage maintenance covenant of 6.5 times. You should also note that while we have no NCM LLC total leverage covenant our total leverage at NCM LLC net of NCM LLC cash balances was approximately 4.2 times at the end of Q1 2017, versus 4.3 times at the end of Q1 2016. As we previously announced, NCM LLC issued 13.8 million net units of NCM LLC to AMC on March 30, 2017 related to the acquisition of the Carmike theaters by AMC. In addition to the annual common unit adjustment of 2.4 million shares issued to the three founding members for their additions and dispositions activity of theatres during 2016. NCM Inc.’s percentage ownership in NCM LLC decreased to 39.3% as a result of the issuance of these units to our founding member this year. During the first quarter we recorded $400,000 of AMC in Cinemark integration payments for Rave and Carmike theaters, versus $100,000 in Q1 2016. You should note that the AMC Carmike integration payments were pro-rated for the quarter as of March 3, 2017 and all integration payments are adjusted – are added to adjusted OIBDA for debt complaisance purposes but are not included in our reported revenue and adjusted OIBDA as they are recorded as a reduction to net intangible assets on our balance sheet. We expect to record approximately $21 million of integration payments from our founding members during 2017. Now let me share with you our guidance for to the full-year 2017. As Andy noted earlier, we expect the first three quarters of 2017 to be challenging. Heading into Q2, we continue to experience a soft scatter market and mix shift in our historically strong ad client categories. The continued softness in the scatter market and this mix shift leaves us cautious regarding our revenue outlook for the balance of this year. We are optimistic about contributions from our new team, new affiliates and new partnerships with STRATA and Media Ocean, as well as Q4 partner spending coupled with the release of Star Wars. Taking all of this into account total revenue is expected to be in the range of $422 million to $442 million or down approximately 4% at the midpoint versus 2016. As a result we're implementing cost reductions to the balance of the year on discretionary expenses to better align with a lower revenue forecast and adjusted OIBDA is expected to be in the range of $202 million to $217 million, or a decrease of approximately 9% at the midpoint versus to 2016. We believe the investments we are making this year is positioning us well for long-term sustainable growth. As we've noted previously, 2017 is a transition year, in which we now have our leadership team in place and we are focused on growing affiliate partnerships and capturing a greater share of growth in our promising digital business. We are excited about the foundation we're building and believe we’ll begin to see meaningful progress starting in Q4 2017 and into 2018. We expect this transition year will drive continued sustainable growth beyond 2018, as we evolve from our position as the largest cinema network into a truly progressive, integrated digital media company. That concludes our prepare remarks. And David will line up for questions.

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Barton Crockett from FBR Capital.

Hey guys this is Zack Silver on for Barton. Thank you for taking my question. The first question is the stock list [ph] that you’ve called out in the first three quarters is that just the kind of macro environment being soft, or do you see a shared shift from your platform to maybe Internet, digital platforms taking share. The second question if I can is if you could update us on the timing of the share sales [ph] for AMC to except [ph] that you can that would be great. Thank you very much.

Thank you Zack. Well we have as you might imagine spent a lot of time thinking about this. And I think the macro environment is certainly playing a part. It's certainly our impressions we look across other media companies that some of the outdoor world may be a little soft and so that may be part of that challenge because a lot of that media [ph] is built by outdoor bias [ph] as you may know in the major agencies. But that may also be the fact that we primarily appeal to advertisers. In the millennials we're overseeing direct competition with some major digital platforms for dollars there as well as they increasingly switch towards video that can't be discounted as a competitive element. So I think your announce is probably appropriate. I think, your second question.

I'll answer the second question. So if you look at the cadence with the DOD settlement requires for the sale of shares from AMC, I’ll just work through those with you. By the end of December, so December 20 of this year they would need sell about 15 million shares, by the end of December 20, 18 million, about another 11.5 million shares and then by June 20 of 2019 another four million shares for roughly 30.5 million shares over that period of time.

Got you. That’s helpful. Is there any way that you can you know give a number of are they – what percentage are there through 2017 or anything like that would be helpful.

Well 30 million shares I’m not sure if I understand you question…

If they sold any of the point?

Well 30 million shares represents about 20% of LLC if you like. And so half of that will be sold this year. And I can assure you will be working closely with AMC to make sure there's an orderly sell down of those shares and strategizing to end.

Okay thank you very much.

Numbers – okay.

Yes very helpful thank you.

Our next question is from Alexia Quadrani with J.P. Morgan.

Hi thank you it’s [Julia Yue] on for Alexia. So staying on the ad market I was wondering how is the softness that you're seeing to start this quarter compared to what you saw on first quarter, is it still auto and entertainment that are the weaker category there is the kind of more broad based at this point? And then when you think about the fourth quarter I was wondering how much of the restrains [ph] that you expected driven by a shift in content partners pending commitment.

You want to do this?

So we’re still continuing to see some challenges of a scatter. Certainly last year and prior years, the last few years autos have been really strong for us. And I think you know there's a lot of research out there that says 2017 autos are going to be spending a lot less and we're seeing that as well. So it's combination of scatter generally across the board and then being hit by a couple of industry players this year. And as far as shifting content partner up front we're expecting to see that push to the second half of the year not a strong in the first half of the year that was last year.

Okay that’s shows that’s both [ph] in the third and fourth quarter,.

Yes.

Okay great thank you.

Thanks.

[Operator Instructions] Our next question is from Eric Wold from B. Riley.

Thank you. Good afternoon. Couple questions I guess first off, kind of thinking about the weakness in kind of [ph] ad outlook near term obvious you're competing against other channels where these ad dollars are going. I guess for the buyer that you’ve typically spoken to that have been spending in theater have you see any kind of change in the tone around the value of in theater eyeballs given what's been kind of I guess an increasing level concern around the impact a recliner seats, and reserve seating and whether or not people get their seats 20 minutes or 30 [indiscernible] starts. I have a follow-up question after that.

Certainly that’s a discussion happens on a regular basis Eric. As you know we discuss it with AMS [ph], we certainly discuss it with advertisers, as well. People assume that there is a correlation between reclining seats and audience build. According to Nielsen, which is the only credible third-part source on the matter, the Nielsen data does not support that correlation but nonetheless it is the discussion that we have with advertisers as well as investors and analysts. I think we continue to have, I think, good conversations with our major customers. I think our business as a high tune [ph] business. Relative to other media companies there are larger cable and broadcast TV companies, for example typically have an assumption that they are going to get business with each of the clients they did last year. The question is how much. Our business is such that advertisers regularly come in and come out in a way that suits their needs for good reason and doesn't necessarily suit our P&L. So for example, they tend to – we have a number of advertisers come to us in the summer because TV tends to under deliver in the summer and if they are looking for high quality premium video impressions in the summer we have a great place to get them. And the same goes with the holiday where there is demand typically outstrip supply across the media world. So there are many pieces to play I couldn't tell you that this is a result of any particular conversations we've had with advertisers but we have as you might imagine ongoing discussions and we are competitive with many other media players. And different decisions happen based on I think clients’ needs on a quarter-to-quarter basis.

No that’s helpful Andy. I guess follow-up there another question for Katie. I guess when mentioning the yield on these calls I think it's always been somewhat of an elevated yield an attractive 7% yield. I think some of that has to play some concerns around safety of that. So I'd love if you could maybe take a couple minutes to kind of walk us through connect the dots between the adjusted OIBDA guidance for this year, projected cash flows that will generate to the company, dividend payments to shareholders and to the value members, kind of how that all flows, just kind of give comfort to that dividend payment at the current 2017 guidance, not assume any improvements in the next year?

Yes I mean I think when you look at the 2017 guided adjusted OIBDA there may be a small deficit spending when you look at how AMC shares will lead [ph] in the market and the timing of those depending on when those shares end up in the public shareholders hands and we have to pay dividends on those, a lot of those quarter-to-quarter shift in seasonality reality, certainly cause us to in some quarters have to use some of that cash reserves. But we believe we have plenty of cash in the bank right now that covers at least three to four quarters of dividends depending on which end of the guidance we’re using. So we're very confident that's certainly a sacred number that we're going to use. Keep in mind that there's $21 million of integration payments coming our way this year, as well. So even the impact of those, the timing of the AMC shares will be offset using those integration payments for the rest of the year.

That's helpful thank you.

Thank you Eric.

[Operator Instructions] There are no more questions at this time. I’d like to turn the call back to Andy England for closing remarks.

Very good, well thank you David and thank you folks for your questions. Obviously a difficult quarter for us and disappointing to be taken down at guidance. But we are very encouraged by some of the progress we’re making against the projects we talked about whether it's signing-up Media Ocean, whether it’s our commitment to CRM, whether it's signing-up new affiliates, whether it's the re-organization that we've done and that gets us moving in the right direction and puts the right people in the right seats. We think all of this sets up well and we’ve very much looking forward to a up front meeting in a couple of weeks, where we will have as I said significant users we've got by that pre-show and our approach to the digital. So thank you for joining us on the call and good luck for rest of the day. Thank you.

This concludes today's conference. Thank you for your participation. You may disconnect your lines.