National CineMedia, Inc. (NCMI) Q3 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the National CineMedia Inc. Third 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] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Katie Scherping, Chief Financial Officer. Thank you, Ms. Scherping. You may begin.

Thanks, Bob. Good afternoon, everyone. I'd like to remind our listeners that this conference call contains forward-looking statements within the meaning of Sections 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 risks 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 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 may be found on the Investor page of our website at www.ncm.com. Now 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 third quarter 2017 earnings call. During this call, I will spend a few minutes highlighting the company's third quarter 2017 results, and Katie will then provide a more detailed discussion of our financial performance for Q3 and discuss our guidance for 2017. And then, as always, we will open the line for questions. I'm very pleased with our third quarter result as we were able to achieve a stable quarter following a challenging first half for the year. As we indicated on our Q2 earnings call, NCM's third quarter did in fact end up pacing ahead of last year as the scatter market rebounded in our favor even as our network attendance was down 16.1%. This highlights that NCM's fortunes don't always have a direct correlation to those of exhibition and are more driven by the demand side of the equation. Total revenue for the third quarter increased 2.6% to $116.4 million from $113.5 million for the comparable quarter last year. Adjusted OIBDA increased 2.8% to $62.6 million for the third quarter of 2017 from $60.9 million for the third quarter of 2016. And national sales team enjoyed increased demand in a significantly improved scatter market in Q3 as NCM's cinema network provided a great place for appetizers to find the premium video GRPs they needed during the season when TV ratings are traditionally low. Our national ad revenue was up 2.7% to $84.5 million versus $82.3 million in Q3 of 2016 excluding beverage revenue from the family members, during the part to 36.1% increase in scatter revenue in the third quarter of 2017 compared to the third quarter of 2016, as well as a nearly 30% increase in digital and other revenue not included in the inventory measured by impressions sold or CPMs. This was partly offset by low upfront and content partner spending quarter-over-quarter which resulted in an increase in national inventory utilization from 132.5% in the third quarter of 2016 to 161.3% in the third quarter of 2017, on a 16.1% decrease in network attendance in a disappointing summer at the box office. Finally, CPMs declined 2.7% in the third quarter of 2017 versus third quarter of 2016. Our local and regional sales team had a solid quarter as well with revenue up 6.3% to $25.2 million from $23.7 million in the third quarter of last year. This $1.5 million increase in local and regional advertising revenue was mainly due to an increase in revenue from contracts over $100,000 driven by rebound within the automotive category which increased their advertising spend from the first half of the year. These increases in local and regional advertising revenue were partially offset by fewer contracts less than $100,000 in the third quarter of 2017 compared to the third quarter of 2016. We also saw a benefit from our strategy of integrating into the Mediaocean and STRATA planning and buying systems, which enabled us to tap into the huge pool of National Spot TV dollars and made it even easier to plan and buy our inventory. On the digital front, although it's still a very small part of our overall revenue, we're continuing to see that kind of growth that validates our commitment to investing in our newbie digital product ecosystem. NCM's Q3 digital revenue increased 58.4% over the last year and is up 36.8% year-to-date. As we continue to improve our cinema accelerated product to increase our digital margins and acquire or develop new digital properties that will allow us to own our digital inventory, we expect digital to be a key part of our growth going forward. Our internal analysis of our clients the made integrated on-screen and digital buys with NCM showed a 26% higher retention rate compared to cinema-only clients and a meaningful increase in spend the following year. Our ability to provide integrated offers certainly bodes well for the future of our business and stats like these demonstrate why we're focused on digital as a key part of our business going forward. I'm excited about the potential of digital and our integrated marketing capabilities which took a big step forward on September 29 with the official launch of Noovie, NCM's new pre-show and premium video platform created to connect brands with movie audiences. Noovie will provide NCM a trademarkable brand that as people discover it will offer them a reason to arrive early to discover what's next in entertainment and has officially replaced FirstLook on all 20,600 screens in 1,700 movie theaters in our national network. We've also launched our new consumer social media channels so you can see what's Noovie on Facebook, Twitter and Instagram. Entertaining content is a core element of Noovie and NCM is programming an exclusive Noovie content part in the show that gives audience a look at what's Noovie in their world including movies, music, local and more. As you may have read, the Walt Disney Studios has signed on as the premier studio of brand Noovie backlog segments through June of 2018, and we'll offer a unique behind the scenes look at the upcoming films from Disney, Pixar, Marvel Studios and Lucasville including Coco, Star Wars: The Last Jedi, Black Panther, A Wrinkle in Time, Avengers; Infinity War, Solo: A Star Wars Story, and The Incredibles 2. The first Noovie backlog segment for Disney Pixar's Coco featured the real-life solo dog going on an adventure at Pixar Studios and it was a big hit with audiences. As you can imagine there is also tremendous anticipation around the never before seen movie backlog content for Star Wars, and I predict we'll have a lot of fans getting to their seats early for that. We've also partnered with Sony Music Entertainment's Rumble Yard on Noovie Soundcheck, an exclusive, cinema-first music series that gives fans a glimpse into those unscripted, under rehersed moments with the band before the concept crowds arrive. The first segment featured Foo Fighters filmed during the soundcheck for their recent landmarks Live In Concert Show shot for the Acropilis in Greece. As it continues to evolve, movie will also feature fun games including name that movie which is enjoying a nice bump following the recent announcement that it's sister property name that tune is coming to CBS and more to come shortly. As I noted earlier, movie stretches beyond the big screen, it will also be an integrated digital ecosystem delivering entertaining content, purposeful commerce and interactive gaming opportunities. We completed our acquisition of Fantasy Movie League in third quarter, and the team is actively creating new NCM consumer digital products for movie audiences. We plan to use the big screen as the trailer for the digital experience driving audiences for our Noovie pre-show to our digital properties and back again. We believe that there is a real synergy between screens of all sizes when it comes to reaching movie audiences and that goes to create but a compelling consumer experience for the movie fans and a great vehicle for brands to reach them. Looking ahead to finish out 2017, we expect to have a stable core quarter comping over a record Q4 '16. As we've said previously, many events seem upfront commitments are hitting a little later than last year. As you know, 2017 also began a transition in NCMs ownership with the court order sale of 30 million NCM shares from AMC over the next two years. That process began in the third quarter and I was pleased to be able to assist AMC in the sale of NCM shares that enabled them to move towards complying with the DOJ consent decree divested full 50% of the required shares with the rest due to be divested by June 2019. The redemption of 14.6 million of AMCs membership units for NCMI common stock increased NCMI's ownership from 39.3% to 48.8% as of September 28. AMC has made an additional redemption of one million of their membership units for NCMI common stock effective October 20, this further increases NCMI shares outstanding to 76.2 million, and its ownership percentage of LLC to 49.5%. The NCM Board, senior management team, and I remain optimistic about our future and the working to achieve our vision to be the connector between brands and movie audiences. We remain focused on our primary strategic initiatives which are expanding our core on-screen business, breaking new digital ground, competing for the pool of National Spot TV dollars, making it easier for advertisers and agencies to plan and buy inventory, growing our affiliate partnerships, aligning resources to strategy and investing in the upgrade of our CRM and other internal systems. Now I will turn the call over to Katy to give you more details about our Q3 2017 operating performance and additional color surrounding our 2017 guidance estimates. Katy?

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, then we'll open the call to your questions. For the third quarter, our total revenue decreased 2.6% versus Q3 2016, driven by a 2.7% or $2.2 million decrease in national advertising revenue, and a 6.3% or $1.5 million increase in local and regional advertising revenue, partially offset by a 10.7% or $800,000 decrease in beverage revenue. Total Q3 adjusted OIBDA increased 2.8% or $1.7 million and adjusted OIBDA margin slightly increased to 53.8% from 53.7% versus Q3 2016. For the first nine months of 2017, total revenue decreased 6.5% or $19.7 million, adjusted OIBDA decreased $21.8 million or 15.1%, and adjusted OIBDA margin decreased to 42.9% from 47.3% versus the first nine months of 2016. The Q3 increase in adjusted OIBDA was driven by the increase in high margin national advertising revenue, specifically in the scatter market. The year-to-date decline in adjusted OIBDA is primarily driven by the decrease at high margin national advertising revenue as a result of fast scatter market in the first half of 2017, the timing of content partner and upfront allocations, and $2.4 million more in onetime adjustment compared to year-to-date 2016. In the third quarter, we recorded $6.5 million of integration payment and other income with theatres payments from Cinemark and AMC associated with Rave Theatres and Carmike Theatres versus $700,000 in Q3 2016. You should note that these payments are added to adjusted OIBDA for debt compliance and partnership cash distribution purposes, but are not included in reported revenue or adjusted OIBDA, as they are recorded as a reduction to the net intangible assets on the balance sheet. We expect to record approximately $18 million to $20 million of these payments from our founding members during 2017. Our Q3 2017 advertising revenue mix shifted towards local and regional, and with 72% national, 22% local and 6% beverage versus Q3 2016 that was 72%, 21%, and 7%, respectively. Q3 national ad revenue increased 2.7% or $2.2 million versus Q3 2016 and was driven by a $2.7 million increase in online mobile and other revenue and a 2% increase in impressions sold, partially offset by a 2.7% decrease in CPM. The increase in impressions sold was driven by strong demand in the scatter market, up 36% year-over-year resulting in an increase in inventory utilization to 161.3% from 132.5% in Q3 2016, partially offset by a 16.1% decrease in network attendance. For the first nine months of 2017, national ad revenue decreased 9.6% or $20.6 million driven by an 8.5% decrease in CPM and 5.3% decrease in impression sold, partially offset by a $4 million increase in online mobile and other revenue. The decrease in CPMs was driven by lower CPMs from upfront and content partner allocations. The decrease in impressions is the result of 6.1% decrease in network attendance partially offset by a slight increase in utilization from 112.9% to 113.9% in the first months of 2017. Finally our quarter end make good balance with $3.2 million at the end of Q3 2017 versus $4.2 million at the end of Q3 2016. Local and regional ad revenue increased 6.3% or $1.5 million versus the third quarter in 2016 and was driven by an increase in revenue from contracts greater than $100,000 primarily in the automotive category and a $600,000 increase in online and mobile revenue. Partially offsetting these gains was a 13.3% decrease in contract value for contracts less than $100,000. For the first nine months of 2017 local and regional ad revenue was flat at $67.8 million for the first nine months of 2016 driven by an increase in contracts greater than $100,000 primarily in the automotive category and a $1.5 million increase in online and mobile revenue. These increases were offset by a 7.5% decline in revenue from contracts less than a $100,000. Q3 beverage revenue decrease 10.7% or $800,000 versus Q3 2016 driven by an 18.1% decrease in founding member attendance. This was partially offset by a 10.2% increase in beverage CPM in the third quarter of 2017 compared to the third quarter of 2016. For the first nine months of 2017 beverage increased 4.1% or $900,000 versus the first nine months of 2016 and it was driven by a 10.2% increase in beverage CPM partially offset by an 8% decrease in founding member attendance. Looking briefly at diluted earnings per share for the third quarter we reported GAAP diluted EPS of $0.15 versus EPS of $0.13 in Q3 2016, adjusted for CEO transition costs in 2017 and 2016 a loss on early retirement of debt in 2016 and a reversal of a reserve for uncertain tax positions in 2017 and 2016 net income for the third quarter of 2017 is $0.12 per share and would have remained at $0.13 in the third quarter of 2016. For the first nine months of 2017 we reported GAAP diluted EPS of $0.10 versus EPS of $0.18 for the first nine months of 2016. Excluding CEO transition related costs and the reversal of a reserve for uncertain tax positions recorded in 2017 and 2016 the early lease termination expense in 2017 and a loss of early retirement of debt in 2016 diluted EPS loss for the first nine months of 2017 would have been $0.08 versus an EPS of $0.20 for the first nine months of 2016. There is a table on our earnings press release that reconciles our GAAP EPS to our adjusted EPS. For the first nine months of 2017 capital expenditures were $8 million versus $9.4 million for the first nine months of 2016. We are estimating that our full year 2017 capital expenditures will be in the $12 million to $13 million range or approximately 3% of revenue. Moving on to our balance sheet, our total debt outstanding at NCM LLC at the end of Q3 2017 was $920 million versus $923 million at the end of Q3 2016. There was no outstanding revolver balance at the end of the third quarter in 2017 compared to $3 million at the end of Q3 2016. Our average interest rate on all debts was approximately 5.3% at the end of Q3 including our $270 million floating rate term loan bank debt. 71% of our total debt outstanding at the end of Q3 2017 had a fixed interest rate. Our consolidated cash and investments as a Q3 2017 decrease by approximately $1.7 million because of normal seasonality in the business to $49.9 million from the end of Q2 2017 with $47 million of those balance at NCM Inc. As we announced today the Board of Directors has authorized the company's regular quarterly cash dividend of $0.22 per share of common stock. The dividend will be paid on December 1, 2017, stockholders of record on November 16, 2017. Our annual dividend yield is currently 12.6% based on today's closing share price of $6.97. We intend to pay our regular quarterly dividend for the foreseeable future at the discretion of the Board of Directors consistent with our intention to distribute over time a substantial portion of our free cash flow. The declaration, payment, timing and amount of any future dividend payable will be at the sole discretion of the Board of Directors who will take into account general economic and 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. While it is our intention to continue our practice of distributing high proportion of our free cash flow, actual results, ongoing reinvestment in our network and product offerings as well as prudent capital management may reduce such distributable free cash flow in future periods. As a result the Board of Directors continue to review these factors to determine a sustainable distribution rate which balances our operating and strategic needs with those of our lenders and stockholders. Our net senior secured leverage in NCM LLC as of the end of Q3 2017 was approximately 3.2 times trailing four quarter adjusted OBITDA 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 debt covenant, our total leverage at NCM LLC net of NCM LLC cash balances was approximately 4.4 times at the end of Q3 2017 versus 4.3 times at the end of Q3 2016. Turning to guidance, for the full year 2017 we have just completed our first month of the quarter and October's results were weaker than last year but Andy mentioned many of our upfront commitments are hitting later in the year compared to last year and we are entering the holiday advertising season supported by a much anticipated movie slate. Based on our current pipeline we expect revenue for the year to be at the lower end of our guidance range of $422 million to $442 and for adjusted OBITDA we would similarly expect to be at the lower end of our range of $202 million to $217 million. To wrap up we're encouraged by the progress we've made in the third quarter and we expect to build on that success as we exit 2017 and move into 2018. As Andy mentioned earlier we feel confident that our continued investments and expanding our core onscreen business, creating a complementary digital ecosystem, our new partnerships with MediaOcean and STRATA and our focus on growing our affiliate business will position us well for the future. That concludes our prepared remarks and now we will open up the line for your questions.

Thank you, Bob. The third quarter was a pleasing performance given the challenges of this year and we are focused on bringing in the remainder of the year. Pleased to have helped AMC with it's recent share sale and excited about the launch of Noovie and new Pre-Show. Thank you for joining us on the call and have a good evening.

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