National Cinemedia Inc (NCMI) 2017 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and thank you for standing by. Welcome to National CineMedia First Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded. I will now 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'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.

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 may be 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 our call in late February, we were experiencing a slow scatter market as available dollars gravitated to large, established reach vehicles. This continued 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 2 largest advertiser 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 a 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 a soft scatter market, which resulted in a 1.3% decline in 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 the first quarter by 1.6% to $19.1 million over $18.8 million in Q1 of 2016. We also continue to benefit from our strategy of competing for National Spot TV budgets by the inclusion of NCM into the STRATA planning and buying system and have put one of our key sales executives in charge of our emerging National Spot TV business.

As you may have seen in our announcement yesterday, we just reached an agreement to become part of the Mediaocean system, which is the leading software planning and buying platform for the advertising world. And we expect to start seeing benefits from the visibility NCM will have being part of the Mediaocean platform beginning in late Q4. Mediaocean's open cross-media platforms power $130 billion in global media budgets and serves more than 80,000 users across agencies, advertisers, broadcasters and publishers worldwide, which makes it a great place for NCM to be to capture some of those ad dollars from spot 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 our 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, engaged millennial and Gen Z movie audiences, high-quality Hollywood event programming and high-impact viewable impressions positions us very well for the future.

As you know, our national preshow 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 at New York City's AMC Loews Lincoln Square Theater on May 17 to showcase the best of the big screen to the media buying community. We will be introducing our new Chief Revenue Officer, Scott Felenstein, who just joined us from Discovery Communications and plan to make some exciting announcements. So be sure to state tuned.

We also made great strides in growing our NCM network in Q1 led by our affiliate partnerships team. Our relationships with our exhibitors were a key focus of our business and are fundamental to continuing to grow the number of impressions we have available to sell for advertisers. As we announced in March, we strengthened our network with the addition of 5 new affiliate partners, adding 71 new theaters, 533 screens and approximately 20 million attendees to our national theater network, enabling us to better compete in the broader premium video marketplace.

While 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 exhibiter which had previously sold their own national advertising in-house. It's gratifying to see exhibitor partners like these who have previously worked with another network recognize the value of becoming part of the #1 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 time line 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 our digital distribution network will allow for the further shortening 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 the 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, to Chief Digital Officer; aligned end-to-end operations under Adam Johnson; and elevated our CIO, Chuck Fredrick, 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. A new agreement with Mediaocean alongside -- 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 as upgrade our CRM system, 4 levels and begin the process of full engagement from the team and using that important tool.

In our Upfront in 2 weeks, we'll have several exciting announcements, including the reinvention of our preshow and the unveiling of our whole new approach to digital. We anticipate the first 3 quarters of 2017 will be challenging while Q4, enabled by content partner spending and Star Wars, will be solid. We expect the value of our 2017 transition and investments will be reflected with meaningful activities in digital, National Spot sales, stabilized network, along with continued strength in the film slate 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 our Q1 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 to your questions.

For the first quarter, our total revenue decreased 5.6% versus Q1 2016, driven by an 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 decreased 26.7% or $6.4 million. And adjusted OIBDA margin 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 as the write-off of an investment of $1.4 million we obtained in the prior year. Offsetting some of these expense increases was a decrease of about $800,000 and 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, net of the 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 noncash stock compensation expense related to the departure of the former CEO, which are both excluded from our 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 a 11.6% decrease versus Q1 2016, driven by a 13.7% decrease in CPM, a 1.3% decrease in impressions sold, partially offset by some other revenue.

Overall, CPM decreased primarily due to the timing and mix of content partners and other upfront commitments year-over-year. In Q1 '16, we had one content partner spend $4.8 million that did not spend any money in Q1 '17. But we expect to see revenue for them later this year.

In addition, as previously mentioned, we experienced general softness from the automobile and entertainment category. And from a recent research report from Morgan Stanley, 2 of the larger industries increasing ad spending in 2017 include the pharma industry, which is not a target for in-theater advertising; and food and beverage, including quick-serve restaurants, 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 '16, partially offset by a 5.3% increase in network attendance propelled by a 17.5% increase in our affiliate attendance and a 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 a 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 a 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 diluted EPS loss of $0.08 versus a loss of $0.07 in Q1 2016. Adjusting for CEO transition-related cost, 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.

And 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 was $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 balances, 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 have 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 a 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 dividends 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. 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 3.1x trailing fourth quarter adjusting OIBDA, which is well below our senior secured leverage maintenance covenant of 6.5x. 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 4.2x at the end of Q1 2017 versus 4.3x 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 3 founding members for their additions and dispositions activity of theaters during 2016. NCM, Inc.'s percentage of ownership in NCM LLC decreased to 39.3% as a result of the issuance of these units to our founding members this year.

During the first quarter, we have recorded $400,000 of AMC and Cinemark integration payments for Rave and Carmike theaters versus $100,000 in Q1 2016. You should note that the AMC, Carmike integration payments were prorated for the quarter as of March 3, 2017, and all integration payments are adjusted -- are added to adjusted OIBDA for debt compliance 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 the full year 2017. As the Andy noted earlier, we expect the first 3 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 category. 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 Mediaocean 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% of the midpoint versus 2016. As a result, we're implementing cost reductions through the balance of the year on discretionary expenses to better align with the 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 2016.

We believe the investments we are making this year are 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 are building and believe we'll begin to see meaningful progress starting in Q4 '17 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 prepared remarks. And David, we'll open the line up for questions.

(Operator Instructions) Our first question is from Barton Crockett from FBR Capital Markets.

This is Zack Silver on for Barton. The first question is the softness that you've called out in the first 3 quarters. Is that just kind of the macro environment being soft? Or do you see a share shift from your platform to maybe the Internet, digital platforms taking share? The second question, if I can, is if you could give us an update on the timing of the share sales for AMC to the extent that you can, that will be great.

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 part. It's certainly our impression as we look across other media companies that some of the outdoor world may be a little soft, and so that may be part of our challenge because a lot of our media is bought by outdoor buyers, as you may know, in the major agencies. But there may also be the fact that we primarily appeal to advertisers aimed at millennials. We're obviously in direct competition with some major digital platforms for dollars there as well. And as they increasingly switch towards video, that can't be discounted as a competitive element. So I think your analysis is probably appropriate. I think your second question...

Yes, I'll answer the second question. So if you look at the cadence that the DOJ settlement requires for the sale of shares from AMC, I'll just walk through those with you. By the end of December, so December 20 of this year, they would need to sell about 15 million shares; by the end December 20, '18, about another 11.5 million shares; and then by June 20 of '19, about another 4 million shares, for roughly 30.5 million shares over that period of time.

Got it. That's helpful. Is there any way that you can give a number of what percentage they are through 2017 or -- and anything like that would be helpful.

Well, 30 million shares, I'm not sure if I understand your question but...

If they sold any at this point?

Yes.

Well 30 million shares represents about 20% of LLC, if you like. And so half of that would need to be sold this year. And I can assure you, we'll be working closely with AMC to make sure there is an orderly sell-down of those shares and are strategizing with them to that end.

Our next question is from Alexia Quadrani with JPMorgan.

This is Julia Yue on for Alexia. Just staying on the ad market, I was wondering, how does the softness that you're seeing to start this quarter compare to what you saw in the first quarter? Is it still auto and entertainment are the weaker categories? Is it kind of more broad-based at this point? And then when you think about the fourth quarter, I was wondering, how much of the strength that you expect is driven by a shift in content partner spending commitment?

So we still continue to see some challenges with scatter. Certainly last year and prior year, the last few years, autos have been really strong for us. And I think there's a lot of research out there that says in 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 in upfront, we're expecting to see that push to the second half of the year, not as strong in the first half of the year as it was last year.

Okay. So that shows up in both the third and fourth quarter?

Yes.

(Operator Instructions) Our next question is from Eric Wold from B. Riley.

A couple of questions. I guess first off, kind of thinking about the weakness in kind of ad outlook near term, obviously, you're competing against other channels where these ad dollars are going. I guess for the buyers that you've typically spoken to that have been spending in theater, have you seen any kind of change in the tone around the value of in-theater eyeballs given what's been kind of, I guess, increasing level of concern around the impact of recliner seats and reserve seating and whether or not people are getting their seats 20 minutes ahead (inaudible) right before the movie starts? Then I have a follow-up question after that.

Certainly that's a discussions that happens on a regular basis, Eric. As you know, we discuss it with analysts. We certainly discuss it with advertisers a well. People assume that there is a correlation between recliner seats and audience build. According to Nielsen, which is the only credible third-party source on the matter, the Nielsen data does not support that correlation. But nonetheless, it is a discussion that we have with advertisers as well as investors and analysts. I think we continue to have, I think, good conversations overall with our major customers. I think we -- our business is a high-churn business relative to other media companies. There are more -- 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, obviously. And 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're looking for high-quality, premium video impressions in the summer, we're a great place to get them. And the same goes at the holiday where there's a -- demand typically outstrips supply across the media world. So there are many pieces at 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. Another question for Katie. I guess when mentioning the yield on these calls, I think it -- and it's always been somewhat of an elevated yield, an attractive 7% yield. I think some of that has to play and there are some concerns around the safety of that. So I'd love if you could maybe take a couple of 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 NCM -- to the company, dividend payments to shareholders and to the value members, kind of how that all flows to kind of give comfort to that dividend payment at the current 2017 guidance, not assuming 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 bleed into 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 shifts in seasonality certainly cause us to, in some quarters, have to use some of that cash reserve. But we believe we have plenty of cash in the bank right now that covers at least 3 to 4 quarters of dividends, depending on which end of the guidance you're using. So we're very confident that that's certainly a sacred number that we're going to use. And 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.

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

Thank you, David, and thank you, folks, for your questions. Obviously a difficult quarter for us and disappointing to be taking down our guidance. But we are very encouraged by some of the progress we're making against the projects we've talked about, whether it's signing up Mediaocean, whether it's our commitment to CRM, whether it's signing up new affiliates, whether it's the reorganization that we've done and that it gets us moving in the right direction and puts the right people in the right seats. We think all of this sets us up well, and we're very much looking forward to our Upfront meeting in a couple of weeks where we will have, as I said, significant news with regard to both our preshow and our approach to digital. So thank you for joining us on the call, and enjoy the rest of the day. Thank you.

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