National Cinemedia Inc (NCMI) 2021 Q1 法說會逐字稿

Good day, and welcome to the National CineMedia Incorporation First Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Ted Watson, Senior Vice President of Finance. Please go ahead.

Thank you, Matt, and good afternoon, everyone. I am joined today by our CEO, Tom Lesinski.

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, including our discussion about the future impacts of COVID-19 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 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 or on the Investor Relations page of our website at ncm.com.

And now I'll turn the call over to Tom.

Thank you, Ted, and good afternoon, everyone. Welcome to our first quarter 2021 earnings call. I hope you're all continuing to stay safe and healthy as spring brings a period of recovery.

Our company and the cinema industry are continuing the slow but steady recovery from the COVID-19 pandemic. During these early stages of the recovery, there are many indications that consumer demand is coming back, and cinema will continue to be an important launching pad for films. More than half of all adults in the U.S., now having had their first vaccine shot, and movie audiences are expanding across the country with the strong opening weekends of Godzilla vs Kong, Mortal Kombat and Demon Slayer. These encouraging trends and the recent positive outlooks of Cinemark and AMC all support what we have been saying since the pandemic started, that there is strong pent-up consumer demand to get back to the unique social experience of the big screen.

In fact, some recent disappointing day-and-date streaming results have many content producers now considering the reestablishment of a new kind of exclusive theatrical window to help launch their films and other scripted content into the streaming services. With these positive trends as a backdrop, I'd like to now provide a high-level update on the steps we've taken to position our company to quickly restart and diversify our cinema ad business, while at the same time, maintaining our liquidity position as we meet the ongoing challenges presented by the COVID-19 pandemic.

Ted will then provide more detail on how we continue to manage our operating cost and our overall liquidity to ensure that our team is prepared to quickly benefit from the incredible movie slate backlog that will begin to drive movie audiences back to theaters this summer. And then, as always, we'll open the line for your questions.

The first quarter of '21 continues to be a challenging time for NCM's business and the entire out-of-home entertainment and advertising industries. Our in-theater advertising revenue remained adversely impacted in Q1 by both significantly lower movie theater audience attendance due to both government-mandated closures and patriot capacity limits and a continued delay of new major motion picture releases.

Fortunately, that began to change in Q2 and with some strong openings and the firming up of the film release schedule for the remainder of '21. As theaters, including Regal's begun to reopen and COVID-19 seating capacity restrictions have begun to loosen, approximately 77% of theaters in our national advertising network are open versus 40% at the end of 2020. While many are continuing to operate under COVID-19 restrictions with reduced capacity and operating hours, those restrictions are loosening up. And for the first time, theaters are open in New York City and other key markets. Ted will discuss all this in more detail shortly.

Fortunately, as you know, NCM LLC's theater access fees, network affiliate payments and Platinum Spot revenue share payments are all variable costs that are driven by attendance, active screens and/or revenue and, therefore, were not incurred for the duration that the theaters were closed and will be lower than historical levels while attendance remains down and for periods where theaters are operating with fewer film show times.

The most encouraging thing is our national theater network is continuing to open more every day as exhibitors get ready for the release of many highly anticipated films throughout the year beginning on Memorial Day weekend. As mentioned, theater capacity restrictions are also being lifted in many parts of the country. In fact, 23 states currently have no capacity limits at all and theaters in all top 10 DMAs are now open. In the key median movie market of New York, the governor recently announced that the state will be 100% open by May 19. And theaters in L.A. also continue to open at 50% capacity with 75% capacity coming soon.

With the recent positive U.S. theatrical film openings and theaters across Asia posting record attendance levels, we continue to be very optimistic about the future of moviegoing. As mentioned on our last earnings call, in March, we closed the bank facility amendment that has provided covenant relief through Q3 of '22 and a new $50 million debt facility. This amendment and funding of the new $50 million tranche have positioned us to hit the ground running this summer and provided additional liquidity for the company to continue to execute on its growth initiatives. We remain focused on the reemergence of cinema advertising as an important part of our clients' marketing plans and the ongoing diversification of our media inventory offerings into existing -- exciting, new complementary digital and Digital Out-Of-Home channels in convenience stores, grocery stores, office buildings and restaurant locations that will allow advertisers to reach movie audiences before they arrive and after they leave the theaters.

Our sales teams continue to have many positive conversations with clients and advertising agencies about getting their brands back on the big screen. The tenor of these discussions has now turned from when audiences will be back in movie theaters to how big of an advertising deal can attendance support. Marketers are very anxious for their brands to reach the hard-to-find theater audiences once again. While some of our great brand partners were back in our Noovie pre-show as soon as theaters reopen, many others have promised us that as soon as audiences are back on a national scale, they too will be back.

With the great box office success of Godzilla, Mortal Kombat and Demon Slayer despite the experimental pandemic, day-and-date streaming options, clients and agencies who were taking a wait-and-see approach now have proof of the power of the unique big screen environment of movie theaters that make all world-class ads and content more impactful.

We're also expecting that these successes will result in the reestablishment of more flexible theatrical windows that allows streaming to benefit even more from the word of mouth and other marketing benefits provided by theatrical exhibition. In fact, streaming has turned out to be a much bigger potential problem for linear ad-supported TV than it has for cinema as at-home audiences have increasingly shifted to watching SVOD non-ad supported streaming services instead of traditional ad-supported linear television. This has resulted in a significant lack of available high-quality video GRPs in the marketplace, especially among younger, highly coveted demographics. And it's forcing advertisers to find new ways to reach large national audiences.

Fortunately, for us, cinema continues to be a great premium video marketing solution for marketers looking to replace their TV GRPs shortfalls. To capitalize on this great opportunity in the new post pandemic world, we're aggressively competing in the TV upfront beginning next week. Our strategy is to implement a very targeted personal approach by going agency to agency, client by client with our new virtual upfront roadshow presentation that highlights our premium Lights Down and Platinum Post Show inventory, which we continue to believe is some of the best video ad real estate available anywhere.

This strategy allows us to position our timely message to the right decision makers at the right time. We're beginning to see good momentum as media buyers recognize cinema as one of the best options in this new media world to reach young, diverse, highly engaged audiences at scale. And not only that, but streaming companies are increasingly becoming some of our biggest advertisers as they now recognize what their linear TV and cable producers have always known that cinema advertising effectively drives tuning.

Linear TV ratings have been in sharp decline since 2016, continuing that precipitous falloff in broadcast, cable, prime and sports audiences over the last decade for the all -- always important 18 to 49 demo, which continues to be cinema's largest audience. This broader market trend of shifting consumer TV viewing habits will be a strong reason for top brands to return to cinema to reach our core young Gen Z and Millennial audience, joining brands who have already begun to return in key national categories such as entertainment, insurance, QSR, digital and streaming services, retail, CPG, gaming, automotive and alcoholic beverages.

While our national team remains focused on securing a base of upfront dollars, the scatter market is also becoming more attractive, and we're seeing more RFPs and having more meaningful detailed conversations and negotiations than at any time during the pandemic, which is highly encouraging.

Our local business is also beginning to rebound as local contract volume is beginning to increase, and there are some local markets where movie theaters are already open at 100% capacity. While national advertising campaigns are planned further in advance, local advertising budgets are spent closer to run time. And thus, over the last few weeks, we've begun to see a real uptick in success in key local categories, including real estate, financial services, travel and tourism, education, professional services and recruitment, home improvement and especially in government and health care, where there's been a flurry of COVID-19 vaccine campaign messaging, budgets being spent in local communities across the country.

It is clear that advertiser demand for cinema continues to be strong. The main limiting factor throughout the COVID-19 pandemic has been the lower number of moviegoers allowed in theaters versus media buyer demand. We continue to be confident as government-mandated restrictions continue to be lifted as the roll out of the vaccine progresses, the significant cabin fever that had been building for over a year now will drive consumers back to the theaters. This will once again allow movie studios and even some of the new streaming companies to rely on theaters to launch their films and other content into the marketplace.

Recent announcements from Warner Bros. and others reflect a recommitment to new types of theatrical windows for future films. This is great news as film release delays caused by the pandemic has created an unbelievable lineup of big movies from now through 2023, which should begin to stabilize and normalize our business in the second half of '21 and beyond.

While our core in-theater advertising business has started to recover, we've continued to focus on maintaining liquidity by balancing cost reduction measures with the need to keep our talented NCM team in place so that we can begin to quickly ramp up our business to meet increasing advertising demand. While many of our temporary pandemic salary reductions and staff roles currently remain in place, we've begun to implement our return-to-work plans as we expect to bring people back to full salary and hours as the cinema industry recovers. I cannot tell you how much I'm looking forward to welcome our great people back, and I remain incredibly grateful to our entire NCM team for their unparalleled resilience, dedication and support during the past very difficult year.

I'm very proud that all of our careful planning and management of our financial and human resources over the past year has not only allowed NCM to survive, but has positioned us for success in a post-pandemic world.

Part of our new positioning relates to our strategy to diversify our media inventory beyond the big cinema screen to the expansion of our apps and other digital products and our new NCM Digital Out-Of-Home sales relationships. These new business opportunities have enabled us to diversify our revenue sources and allowed us to create a unique bundle of our in-theater inventory with our digital and our Digital Out-Of-Home channels that will open the door to new advertisers and new pools of ad dollars. This strategic expansion and diversification of our ad inventory to offer complementary and integrated ways for brands to reach our attractive audiences beyond the walls of the theater on digital devices and within other out-of-home venues is generating more inquiries and starting more discussions than ever before.

Marketplace reaction has been very positive, especially initially in the local arena, where this inventory has been -- has really opened up some new categories for us, including state lotteries. Advertiser interest in CoinStar and ATM. TV has also benefited from the continued high traffic of supermarkets and 7-Eleven stores. And now that the restaurant and office building traffic is increasingly coming back, our NCM Digital Out-Of-Home network will soon be firing on all cylinders with the recent addition of Ziosk and Captivate.

We also have a few other exciting new digital initiatives that are increasingly important to our future success. A new data partnership with one of our founding member exhibitors to supply movie ticket data will greatly expand our ability to leverage audience data and create more robust targeting solutions for advertisers. This new movie ticket data reinforces our current audience data pool and makes our data offering significantly stronger, enhancing not only our scale, but our depth with a meaningful increase in deterministic data. It also allows us to create custom closed-loop attribution measurement for brands and movie studios alike.

This new valuable movie ticket audience data is expected to grow our data sets to $300 million by year-end and power our Noovie Audience Accelerator Digital product with what we would believe will be the largest and most pristine movie audience data set available in the marketplace. As government regulation and policy changes by the dominant digital companies and third-party cookies and use of second and third-party data, our theater audience, expertise and robust theater audience data will enhance our ability to compete with other larger digital advertising platforms for marketing dollars.

We've also formed an exclusive relationship with Vobile, a SaaS industry leader in content recognition, protection, monetization and marketing to sell brand-safe, reservable digital video ad entry alongside movie content, like movie clips and trailers on top of video platforms, including YouTube. This allows us to offer digital audiences at scale to connect brands with movie fans while they're engaging with the best online movie content across the biggest video platforms.

Providing access to the hottest trailers and fan favorite clips provides averages with premium brand-safe ad opportunities, this partnership provides NCM with over 120 million additional monthly digital ad impressions to sell with other valuable on-screen and digital out-of-home options.

Our new Digital Out-Of-Home and social video platform inventory will also provide us with 2 entry points into the programmatic buying marketplace, which is an important step in our strategy to make all marketing products easier to buy. Our capital investments in our new cinema advertising management system that was launched in Q1 will lay the foundation for programmatic access to our onscreen inventory, which we expect will create additional monetization opportunities for our in-theater inventory in the future.

So as you can see, while the pandemic brought many difficult challenges, it also gave us an opportunity to think about our business differently and begin to execute several new strategies. We were able to expand our cinema network with the addition of Harkins Theaters, the fifth largest theater operator in the U.S. This cinema network expansion, combined with the acceleration of our digital strategy and the diversification to selling video -- selling inventory in other out-of-home venues beyond cinema will allow us to become an even stronger media company with multiple and extremely compelling new ways to unite brands with the power of movies and engage movie fans anytime and anywhere.

I remain very grateful to our entire NCM team, our Board, our exhibitors and our advertising partners. And I again sincerely thank them for their continued support as we navigate this historic and turbulent time together.

While some uncertainties related to the COVID-19 pandemic remain, we believe that we have positioned our company very well to quickly reestablish the growth momentum that we've created before the pandemic started. With the strong feeling of optimism about the ongoing recovery, our Board has left our dividend at $0.05 for the current quarter. Thanks to improving market conditions and the dedication and hard work to our entire team, I can honestly say that the future is truly starting to look bright again for the first time in more than a year.

So with that, I'll now turn the call over to Ted to discuss more details about our cost savings measures, liquidity position and outlook. Ted?

Thank you, Tom. As we begin to emerge from the COVID-19 pandemic, we are seeing encouraging signs that our business is positioned for a strong recovery in the second half of 2021. As our network was still significantly impacted in Q1, with only 60% of our network theaters opened and attendance down almost 90% year-over-year, we recorded only $5.4 million of Q1 revenue, down 92% for the comparable quarter last year. Given the continued significant impact of the COVID-19 pandemic on our business throughout the current quarter, an analysis of our revenue and adjusted OIBDA in Q1 versus prior periods is not meaningful.

As you will recall, the pandemic only impacted the last few weeks of Q1 2020. Thus, current quarter results do not fairly represent our ongoing business. As such, I will focus much of my comments today on our current liquidity position, our continued success in limiting our monthly cash burn rate as well as providing some additional thoughts on how we see our business recovering through the remainder of 2021.

With the lack of any meaningful in-theater advertising, total Q1 adjusted OIBDA was negative $16.2 million. As has been the case the last few quarters, the combination of our highly variable operating cost structure and our proactive overhead cost reductions have allowed us to limit our adjusted OIBDA losses in the current quarter and during the entire pandemic.

Our Q1 average cash burn rate was approximately $10 million per month versus $11 million and $12 million in Q4 and Q3 of 2020, respectively. A significant amount of our operating cost reductions has been related to personnel. During Q1, over 75% of our employee base continue to be furloughed or had salary reductions of up to 50%. These cost reduction measures reduced our core operating expense in Q1 to $5.6 million per month compared to our pre-COVID run rate of $9.5 million or a savings of 42%.

As we have discussed in the past, due to our high gross operating margins, as restaurant levels begin to build, we will achieve operating cash flow breakeven after debt service when our quarterly revenue reaches approximately 50% of 2019 levels, which we currently believe will be achieved as we exit Q3 of this year.

For the first quarter, we reported a GAAP loss per diluted share of $0.25 versus a loss per diluted share of $0.05 in Q1 2020. This earnings decrease was again the result of significant network attendance declines resulting from the impact of the COVID-19 pandemic on the cinema business.

In the first quarter, we recorded 0 integration and other encumbered theater payments primarily related to AMC Carmike theaters versus $1.4 million last year. The AMC integration payments are based on what NCM could have earned had advertising been sold in those theaters by our sales teams. As a reminder, these integration and other encumbered theater 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.

Moving to our balance sheet. Our total debt, net of cash at NCM LLC at the end of Q1 2021 increased $69 million to $917 million versus $848 million at the end of Q1 2020. Our average interest rate on all debt was approximately 5.2% at the end of Q1 compared to 5.1% at the end of Q1 2020, including our $313 million floating rate term loan bank debt and revolving credit facility that had a rate of approximately 5.6%. Excluding revolver balances, 67% of our total debt outstanding at the end of Q1 2021 had a fixed interest rate.

NCM LLC's current cash balance, including the Term Loan B proceeds that was closed in March, is $118.7 million plus $3.9 million in accounts receivable. Assuming an average of $11.5 million to $12 million per month cash burn rate with our high operating cash flow margins and revenue expected to begin to build in June through the back half of 2021, we believe that we have sufficient liquidity until we begin to produce positive cash flow after debt service later this year. As mentioned, we only need revenue to equal approximately 50% of 2019 to breakeven on a cash basis after debt service.

As Tom mentioned, our Board of Directors has authorized an NCM Inc. quarterly cash dividend of $0.05 per share of common stock. The dividend will be paid on June 7, 2021 to stockholders of record on May 21, 2021. This quarterly dividend will result in a current yield of 4.6% based on today's closing share price of $4.39. Given the current NCM cash balance of $52.8 million, our current $0.05 dividend can be paid for the next 3 years with no additional NCM LLC distributions to NCM Inc. This is well beyond the NCM LLC distribution restrictions contained in the recent bank debt amendment that will terminate at the end of Q3 2022.

The company intends to pay a regular quarterly dividend for the foreseeable future at the discretion of the Board of Directors. The nearly 3 years of dividend cushion is considerably longer than what we have historically targeted. We will continue to monitor this cushion and related dividend level consistent with the company's intention to distribute over time substantially all its free cash flow. As always, the declaration, payment, timing and amount of future dividends payable will be at the sole discretion of the Board of Directors who will consider 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. This includes impact to the company related to the COVID-19 pandemic and restrictions under the NCM LLC credit agreement.

Finally, while market conditions are improving rapidly, there continues to be a number of uncertainties related to the impact of the COVID-19 pandemic on our business, making it difficult to provide reliable future revenue and adjusted OIBDA guidance. So with that said, I will leave you with a few qualitative thoughts regarding our business performance for the remainder of 2021.

Given everything we know today, I would expect our revenue to begin to meaningfully increase in the month of June as network attendance levels are not expected to begin to pick up until Memorial Day weekend when the first of several tentpole films is scheduled to open. However, monthly revenue will still be below 2019 pre-pandemic levels until Q4 as we will primarily be relying on the scatter market, given we have substantially less upfront commitments due to our inability to participate in last year's upfront marketplace because of the continual shifting of the film slate.

Fortunately, with film schedules beginning to firm up for the remainder of the year, we can now begin to compete more aggressively for scattered budgets and compete in the TV upfront that is just beginning next week. Those TV upfront commitments that we secure beginning in Q4 will be a significant driver of our Q4 revenue.

As Tom mentioned, given the significant decline in TV ratings, we are very optimistic about our success in attracting meaningful levels of upfront commitments. Given this national booking outlook and a continual ramping up of our regional and local businesses, it is our expectation that by the end of Q3 2021, we will be at a monthly run rate of more than 50% of 2019 revenue levels required to achieve cash flow breakeven after debt service on an accrual basis.

And by the end of the year, we expect to be trending back towards 2019 revenue levels, assuming that theatrical schedule remains firm, COVID-19 cases further decline, allowing government restrictions to continue to decrease and an upfront that is consistent with our expectations. With every passing week, we should have a better understanding of theater attendance trends and our success in the scatter market and upcoming TV upfront. And we will provide an update to this general Q3 and Q4 business guidance during our second quarter earnings call.

This concludes our prepared remarks, and we will now open up the lines for questions. Operator?

(Operator Instructions) Our first question comes from Eric Wold with B. Riley Securities.

A couple of questions. I guess, one, when you noted that some of the advertisers are kind of on the sidelines waiting for audiences to return kind of "on a national scale". Can you maybe define that a little bit more in terms of what they're looking for markets open, maybe average capacity? What's kind of guiding their decisions there?

Yes. I don't think actually they are any longer looking for any more data. What they know now with almost 80% of our network open and with 3 movies that have opened well, I think it's just a matter not so much of the restrictions or the audience levels, it's really just getting another couple of movies under our belt. But we're already seeing a lot of activity post just in the last week or 2 with more and more theaters opening.

So candidly, it's just a matter of time, and I think a relatively short period of time based on the amount of meetings, RFPs and discussions that we're having. I don't think there's anything fundamentally wrong with the attendance levels right now. We just need to stitch together a couple more movies which is going to happen right here towards Memorial Day in the next few weeks. And then we should be off and running, looking really towards June being -- and July being important months for the growth in the revenue side.

Got it. And you noted that the majority until Q4, the revenue is going to be driven by scatter, how do you balance wanting to entice advertisers back into the scatter market with not wanting to drop CPMs to a point where they're not recoverable?

This is a funny -- it's funny you asked because I ask this question all the time to our sales team. And candidly, there is no issue with clients and agencies looking for discounts. It's purely about just making sure that they're comfortable with the release schedule and that they're comfortable candidly, with what's going on in terms of theater going.

And all of that looks very positive. There has not been any meaningful discussions or even asks on the discounting of CPM. So we've built a premium CPM business over the last 21 years, and we plan on continuing to do that. So we're not in the discount business. And candidly, we don't have to be, and we haven't been asked to be.

And just final question. Anything more you can talk about with the movie ticket data agreement in terms of what level of data is coming to you and kind of what you had to give up in return for that?

Well, we made an economic licensing agreement to get better data. We're not going to disclose the specifics of that agreement. But it was a market-based deal and an arms' length deal to get data from the third party. I think it's important when you look at the quality of the data to get information about movie theater goers in detail already wedded to the amount of data we've been getting ourselves.

We believe we'll have the best cinema data business around. And we plan on continuing this business and going to other third parties and possibly other exhibitors to strengthen that data. But it's really providing 2 benefits. One, it's providing a significant additional piece of data for our salespeople to use when they go out and make a pitch and having that kind of data in the same way that Facebook and Google and others do and having deep knowledge about our consumer is really critical not just to maintaining CPMs, but growing CPMs and growing the interest level in our ad buy.

So we're really excited about the data business. It's about 1.5 years old now. It's growing as fast as we would have thought it would. But candidly, I would say that the quality of the data has gotten -- is even better than we really planned when we first set off to do this.

Our next question will come from Mike Hickey with The Benchmark Company.

Just curious on your commentary on guidance. I'm sure by the end of '21, you expect to be trending back towards '19 revenue levels. Can you help size that? Is that sort of implying that '22 is going to look like '19 on revenue? Or do you think you'll be 70%, 80% there? If you could just sort of double click on that commentary to help two of our models, I appreciate that.

Well, I'm going to let Ted answer this as soon as I just say in general, we feel relatively confident and optimistic based on all the things that are happening in the marketplace. That towards the end of Q4, we'll start getting closer and closer to where we were in '19. I'm not going to give you a specific percentage today. I think it'd be more appropriate for our next call in the summer. But Ted, if you want to opine on that a little more, feel free to.

Yes. Mike, It's clearly way too early to talk about 2022. I think for Q4 '21 really what underpins our belief that we can start trending towards back 2019 levels is the movie slate. So I think we've been encouraged by what we've seen to date with people coming back to the movie theaters. And our assumption is more and more people will continue to get vaccinated, restrictions will be lifted. And then with the movie slate, I've seen everything from an optimistic projection that people think Q4 attendance could be flat or in line with 2019. I've seen projections that maybe attendance is down 10% to 20%, right? But either way, I think it's expected that it's going to be a strong quarter.

So our belief is, assuming that plays out on the attendance side, then as Tom said, with the upfront discussions we're having, we do need to close a significant amount of upfront business. But we're feeling good about that. And if those 2 things can happen, we're feeling pretty good that as we exit 2021, we can be getting back towards the 2019 levels.

I think the other thing I would add as a relatively new piece of data is the government recently, literally today approved the vaccine for 12- to 15-year olds. And as we are one of the leaders in delivering Millennial, Gen Z and teens to advertisers, as that vaccine rolls out to that core teenage audience, we know that they are very highly indexing moviegoers in that teenage group. And now that they're able to get vaccinated beginning immediately, that will only help us bring more advertisers and more confidence to our great platform.

Nice. Curious on the national side, when you look at sort of the top DMA markets, how has the recovery been there, I guess, specifically? I'm guessing it's just now happening. But curious your view there? And maybe more broadly, where you're seeing the strongest recovery in attendance? And is it purely just sort of virus-related? Or if it has to do with how long the theaters have been opened? Or if it's slate, but just sort of pockets of strength that you see across your network. And then specifically, what's happening in your top DMA markets for national (inaudible).

So I think I can try to give you some specifics around that. But I think it's relatively intuitive that the markets that opened -- the major markets that opened later obviously are not doing as well as the ones that have been open for a while. So you think what's been going on in the Southwest and in the South, where markets like Miami and Dallas and Houston have been far less restricted than New York and Los Angeles and San Francisco. So I think, generally speaking, at least during this -- in this current COVID era, it's been the markets that haven't been restricted.

We have seen a really great response though already in theater attendance levels in New York and Chicago when recently in Los Angeles. So as these restrictions have opened up, we're seeing an immediate impact in New York and Los Angeles and Chicago which are obviously the 3 biggest markets in our network. So I would say for the past 3 months, it's mostly been the South and Southwest. But I think now just in the past month or so, all the major markets, particularly in New York and Chicago, they have recovered nicely.

Nice. Maybe last question for me. Another very bullish commentary on guidance looking to be cast flow positive here in the third quarter. What's your view on capacity constraints? And how will that influence your ability to be cash flow positive? And should we be looking to sort of getting to that 70% level? Or can you think you can be there at sort of an average 50%. Maybe any other data as it relates to utilization, CPM attendance, in that third quarter? I know I heard the 50% of revenue. That seems achievable. But sort of some of the deeper metrics would be interesting if you have any thoughts on that.

Ted, do you want to cover that one? And then I can maybe...

Yes. I would say from a capacity restriction, in many places already well above 50%. But if we could be at 50% or better, I think that allows us to be able to deliver. On that, I think it was AMC that said on our earnings call the other day that in 2019 they only utilized like 20% of their network over the course of the year. So even with 50%, there's clearly plenty of availability. You might run into it on an opening weekend of a tentpole. But generally, I think we're fine there.

Again, without giving guidance, as Tom said, I don't see CPMs being an issue. I think it's just going to be the ability to close on the scatter business, Q3 in particular. Q4, we'll have the benefit of the upfront. But I think Q3 will be driven by the scatter market.

The one other point I would highlight that I want to emphasize, and I said it in the script is we'll be cash flow neutral from an accrual basis. And so by that, I mean, clearly, if we get to 50% of the revenue, we're better on the P&L. But again, recall from a working capital perspective, it takes us about 90 days to collect revenue. So even if you're at 50% revenue by late Q3, it's still going to be Q4 before you start collecting that cash. So I would caution folks not to assume that cash starts to build in Q3. It probably would bottom out in Q4 and then begin to build from there.

One quick one, last one. The -- in terms of ad categories, leading you out. Auto, I think, has been a pretty important fourth quarter. It looks like maybe that's challenged this fourth quarter compared to others given the chip shortage and other issues on supply. You also mentioned maybe some new categories coming in. So can you just give us sort of a brief look at the mix that you would expect in the fourth quarter and maybe into '22?

Okay. So the biggest category is still the entertainment category, particularly the streaming companies, including those who are both in social media but also in streaming. And they've been a core advertiser for us through the pandemic, and we're in the upfront and have continued to be supportive.

Insurance, I would say. Is probably the next big category that's been supportive. QSR and then, of course, after that, probably CPG, automotive and alcoholic beverages. Not every automotive company is going through chip shortages, some are and some aren't. We have deals on the books with automotive companies right now, and we expect to have more of those as the chip shortage gets cleared up.

I think we've been fortunate particularly to have long-standing relationships in all the major categories. And I think thanks to the team we have with Cliff and Scott leading it, that those relationships have continued. There's not a category that we've been in for the past decade that's not going to be with us during the reopening in the second half. And I think we've had some really pleasant surprises on local, at least now, which has been the heavy interest we've gotten from the lottery in most local markets, particularly for our Digital Out-Of-Home business.

(Operator Instructions) Our next question will come from Jim Goss with Barrington Research.

Let me start with the notion of the premium experiences, IMAX in particular and PLF have been over-indexing with the early screenings. And I'm wondering what that impact might be on NCMI. As I recall, you don't necessarily have the same degree of exposure in IMAX. Maybe you have more in the PLF experiences. But would this veer to blockbusters, just wondering how that might influence your business.

So Jim, I can't tell you off the top of my head, what percent of our network in those widescreen or larger screen formats. I can tell you that we get paid based on attendance. And whether someone attends a larger screen format or a smaller screen or a medium screen, we count all of those eyeballs the same. So as theatergoers return and if more indexed to the larger screen formats, we'll benefit from that. And if people choose to go to other sized normal formats, we'll benefit as well. So regardless of the consumer choice or what might be sort of trending, we get credit for that, and we'll be rewarded for that.

Okay. Even if the -- they don't really see the ads because the ads aren't shown in those screens?

Well, it all depends. Some of the large screen formats do show advertising and some don't. So it really depends. And certainly, I can -- when I talk to you later, I'll try to pull what percent of our screens fall in the category you're talking about. But we haven't noticed anything so far as it relates to attendance being different, but we'll certainly look into it.

Okay. The Coke and PSA ad, how long before those -- there's a renewal in either of those categories? And are you looking to change...

Just for clarity, so the Coke relationship or Pepsi or whatever the beverage relationship really is, one that is both negotiated and controlled by the exhibitors, and we certainly get a share of that revenue.

As it relates to the length of time of those contracts and the negotiation, that's something I don't have visibility to. It's really what our core founding members do with those key beverage companies. The PSA inventory is -- the exhibitor decides what they're going to do often on a local or national basis. And those are not paid inventory. So it's effectively not an impact on our revenue.

Okay. And you brought up the lifestyle inventory. I wonder if you had any guidance about presales of any of those ads, the premium ads?

Without getting specific, I can tell you that there's a lot of interest in our post-show ad platinum inventory. I think when the next earnings call rolls around, we'll be able to give you more specific visibility on that. But it would be premature to do that on this call. So if you're just patient for a few months, we can give you more visibility on that.

And Jim this is -- Jim, sorry, this is Ted. Just to circle back to your first question on premium formats. We do serve ads on IMAX screens and other premium formats. So that's not an issue.

Okay. I was just trying to recall if I had noticed someone I enter my mixes, and I didn't think they were quite as relevant. I mean...

There's very few theaters that don't show advertising in them, ArcLight was one of them. But the vast majority of exhibitors across all of the spectrum and entertainment are carrying advertising in the preshow or post show.

Okay. And a last one. When TV broadcasters, over time, some of their pricing has gotten better as their audience has gotten smaller because they were still the only way to reach a mass market. I'm wondering if you've had any of that phenomenon. If you have premium advertising, even if it's not as big as it was, it's still bigger than you might get otherwise and that could help your pricing. Have you seen that picker?

Let me follow that, Ted, did you -- if you follow that, you can answer or I'll have to ask Jim just to...

Yes, Jim, not sure. Could you expand on that?

Well, I just said over time, like in some of the upfronts, for example, some of the upfront pricing has increased at the network level even when the audience levels declined because there was still a bigger audience you could get otherwise, and it sort of offset some of the decline in the absolute size of the audience. And I just wondered if there's any of that phenomenon during -- involving scarcity value that's helped pricing in your theater even when you [needless]?

Yes. Well, so over the pandemic period, that hasn't been the case. What I can say is as we go into the new upfront, the television upfront in Q4, which is starting now, we'll be anxious to see what the reaction is like is to our pricing strategy. As you know, we've got some of the most expensive CPMs in the industry, far more expensive in many cases than network television and broadcast cable.

In the television world, the scarcity has certainly driven CPMs up just because candidly, there isn't enough impressions to go around. So it's a supply and demand situation. But we're confident that we'll be able to take advantage of the lack of GRPs because of television's underperformance as we go through the next 6 months of scatter and upfront.

Yes. And Jim, I would just add that to your question on television CPMs to the extent that television is seeing a dramatic increase, it certainly doesn't hurt us. It's one of those that rising tide lifts all ships. So from that perspective, we'll see what we get as we get into the upfront. But from a pricing perspective, that should only help provide a tailwind.

This concludes our question-and-answer session. I would like to turn the conference back over to Tom Lesinski for any closing remarks.

Thank you. As I've mentioned previously, we're very well positioned for the future as we leave it difficult last year behind us and focus on the opportunities ahead, as the COVID-19 vaccine rolls out and accelerates and as the country begins to reopen in earnest and theater audiences return. All of our research indicates strong consumer demand to see films on the big screen once again. And with all the 2020 film -- excuse me, with all the 2020 film launch delays, the 2021 film slate looks to be the strongest in years.

So despite the challenges of the last year, the hard work of our team to expand our cinema network, strengthen our digital offerings and initiatives and begin to diversify our advertising impressions base leaves us very optimistic about capturing additional video advertising market share as declining TV GRPs make our young audience even more attractive to media buyers.

I'd like to thank our senior management team and staff and once again for all the hard-working efforts during these difficult times. And I think our shareholders and lenders for their support in patients as well. We truly appreciate you joining us on the call. And I hope that everyone continues to stay safe and healthy. I look forward to seeing you soon again at the movies. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.