National CineMedia, Inc.

Greetings and welcome to the National CineMedia, Inc. Q3 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require an operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to our host, Mr. Ted Watson, Senior Vice President of Finance. Thank you, sir. You may begin.

Thank you, Diego. Good afternoon, everyone. I am joined today by our CEO, Tom Lesinski. Before we get started, 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 risk 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 with that, I'll turn the call over to Tom.

Thank you, Ted, and good afternoon, everyone. Welcome to our third quarter earnings call. It continues to be a challenging time for the out-of-home entertainment and advertising businesses, our country and the world, and I'd like to once again thank everyone for their ongoing support of NCM as we work hard to stay safe and help protect our loved ones, our colleagues, and our community. Today, I'll provide a high-level update on what we've continued to do in response to the ongoing challenges presented by the COVID-19 pandemic, theater closures, and the shifting movie release schedule. Ted will then provide detail on how we're managing our expenses and overall liquidity to navigate these extraordinary times and to position the company to benefit when movie audiences return in larger numbers to our cinema partner theaters. And then we'll open up the line for questions. As we experienced this past quarter, unfortunately, we do not control the timing of our film releases or theater reopenings. While we had an initial positive step forward with the release of the film Tenet in early September, The first Ten Bull film released after the start of the COVID-19 pandemic. When that film performed below expectations, studios shifted other big titles into 2021. When Tenon opened, some theaters had not yet reopened due to the local or state mandates. Certain theaters also closed again after other films were delayed, including regal theaters in the U.S. and other countries. As of the date of this call, 53% of theaters within our network are open, and many with restricted operating schedules. While we have limited control over some of the factors impacting the cinema business, we do have control over our spending levels and our place as one of the leaders in the video advertising marketplace. This is where we continue to focus our efforts, including continuing to aggressively sell our advertising products and nurturing our many close client and agency relationships. Due in part to our efforts, there continues to be strong demand from several of our core advertisers, including Amazon, Mars, Turner, Progressive, Ford, AT&T, and Heineken, who are all back up on the big screen for the opening of Tenet. In fact, we're in the unusual position where the limiting factor to our revenue is not advertiser demand. It's the impressions we're able to deliver as that remains adversely impacted by state and local theater operating restrictions, COVID health concerns, and our reduced theatrical schedule. Despite the ongoing pandemic health-related concerns, we continue to receive very positive feedback from moviegoers on the improvements made to the moviegoing experience by our cinema partners and the steps they're taking to make the theater experience safe. We continue to survey our proprietary NCM behind-the-screens panel of movie fans, and 93% reported that they had a great first trip back to the local movie theater. They ranked their experience at the movies higher than any other out-of-home activity, and thanks to the exhibition industry's extensive cinema-safe theater safety and cleaning protocols, concerns about health were very limited. Going to the movies remains the number one out-of-home activity that people are most looking forward to. Recent cancer research indicated that consumers preferred cinema ads, in fact, over digital, TV out-of-home and print ads. Based on our own research and on the success of box office returning to pre-COVID levels in places like China and Korea, where there's a significant new film product availability, we continue to believe that consumer demand for the theatrical experience remains strong and audiences are poised to return as soon as new tentpole movies are released and a vaccine becomes available broadly. Though the ongoing impact to revenue during Q2 and Q3 is quite challenging, it's important to note that NCM benefits from a very high margin business model that features many expenses that are variable with the level of theaters operating and or revenue generated. Our theater access fees, network affiliate payments, and platinum spot revenue share payments are all primarily driven by attendance, active screens, and or revenue. And these costs have been significantly reduced for periods that theaters were closed and will continue to be reduced for the period of time that attendance is lower than historical levels. This highly variable cost structure along with significant overhead cost cutting measures has allowed us to continue to manage our expenditure levels and maintain a strong liquidity position. At the same time, we're positioned to quickly return to positive cash flow when theaters' attendance begins to normalize. As we previously discussed beginning in March when the pandemic started to force theater closures, we immediately took steps to preserve liquidity and cut our operating costs that impacted 100% of our workforce. At the same time, we continue to aggressively compete in the advertising marketplace as the 2020-2021 upfront selling season began. In August, we began to bring our employees back in a phased approach to ramp up our network operations in preparation for theaters to reopen for Tenet. Since that time, cinema industry conditions have continued to remain fluid with shifting movie titles and theater closures. We are now re-implementing furloughs and temporary salary reductions for over 30% of our workforce that on an annualized basis will save $8.1 million. In addition to this, we have undertaken a 20% reduction in force that result in annual savings of approximately $11 million. Together, these represent an impact to 50% of our pre-COVID workforce. As we continue to evaluate the short and medium-term needs of our business, our goal is to remain flexible so that we do not permanently impair our business such that our longer-term plans cannot be reinitiated quickly as external factors continue to evolve. We believe that these significantly lower cost levels and relatively strong cash position that was augmented by an aggressive receivables collection effort will allow us to weather the impact of the COVID pandemic. NCMLLC currently has a cash balance of approximately $137.5 million and $7.5 million in receivable balance that should continue to build through the remainder of 2020 and into 2021. We currently have a cash monthly burn rate of $11 million, including our debt service cost. This monthly burn rate is expected to continue through Q4 until revenue levels begin to pick up towards the end of the quarter and receivables on the new revenue begin to get collected. Should all the theaters close again, we can very quickly scale our monthly burn rate back to the past summer levels of $9 to $9.5 million, leaving us with almost 15 months of liquidity. Ted will provide you with some sensitivities to think about liquidity runway in a few minutes. Despite the strong liquidity position and the fact that we are current in all of our debt obligations and expect for the foreseeable future. Due to the continued delay in the film release schedule and theater openings, we are discussing an extension of the amendment to our senior secured credit facility received in April that will see us through to a COVID-19 recovery. While we and our theater partners have been frustrated by the restrictions placed on their operations by various governmental bodies, there was a bit of positive news a couple weeks ago as Governor Cuomo announced that movie theaters outside of New York City may open to a limited capacity of 25% or 50 people beginning October 23rd. That was an important announcement as New York and California represent an outsized impact on the exhibition industry and one of the factors leading to delay in the release of many films. We're hopeful that the New York opening will be a catalyst that will lead to the opening of LA County and New York City and a more normalized film release schedule can soon follow. With the cinema's lot to reopen and film releases potentially starting to build at the end of Q4 into 21, we have remained active in the 21 upfront marketplace in order to ensure that we have sold ad commitments against the expanding impression base. Despite the less than positive press on cinema, I'm proud of the job our sales team has done keeping cinema and agency on top of their mind with our clients and agencies. Clients remain enthusiastic about the many great upcoming films, and many more. We are in active discussions with all of our incumbent partners about 2021 as well as a strong group of new advertisers. Given the persistent decline in TV ratings as viewership continues to migrate to streaming platforms combined with the aging up of the television audience, brands are desperate for places to find young consumers at scale and cinema is a great way to fill that need. In fact, Despite the severely limited impression base available currently on our network in October, NCM had the fourth highest rated among cable prime time for the demographic group of 18 to 49 year olds in October. Major advertisers are also actively planning cinema for next year with so many titles shifting into 21. This release schedules every bit as promising as it was in the record box office years of 2018 and 2019, with major titles including Ghostbusters, the James Bond movie No Time to Die, Fast and Furious 9, Black Widow, Godzilla vs. Kong, Top Gun Maverick, Dune, The Eternals, the Aretha Franklin biopic Respect, Fantastic Beasts and Where to Find Them, Mission Impossible 7, Steven Spielberg's West Side Story, and of course Matrix 4. It's also important to note that while tentpole films are a critical driver of cinema attendance, many smaller films are continuing to open and some are performing better than expected. as they're receiving more consumer attention and screen time. While our third quarter national, regional, and local on-screen advertising revenue was limited to the last three weeks of the quarter, we continued to benefit from our digital business. In particular, our local sales team continues to successfully shift on-screen commitments to our digital platforms during the period when theaters were closed. Our ability to continue to generate revenue from our digital businesses while theaters have been closed demonstrates our ability to leverage our unique first- and second-party data This ability to deliver movie audiences to our brand partners allows their marketers to leverage and engage our valuable audiences, even when theater audiences are more limited. This stronger digital offering positions as well as movie audiences begin to return to theaters and we're able to provide marketers with an even stronger unique bundle of on-screen and digital advertising products. The ability to sell digital while theaters have been closed highlights the benefits of our strategy to diversify our revenue streams. We continue to also improve the quality of our on-screen product and improve the efficiency of our on-screen and digital selling platforms as part of our five pillars of growth. Even in the current environment, we look to the future and it's imperative given all the new digital options available to marketers that we make our products easy to buy. To that point, we now sell digital inventory programmatically and we'll soon begin development on a solution to sell our on-screen inventory programmatically after the expected launch of our new inventory management systems in Q1 of 21. We've also begun to pursue opportunities to leverage partnerships across digital out-of-home and OTT and we continue to explore out-of-home advertising corporate development opportunities that will leverage our high-quality sales force and strengthen our unique bundle of on-screen and digital advertising products. With the expectation of our business recovering in 2021, our Board of Directors has left the NCM dividend of $0.07 per share unchanged for the third quarter. The dividend will be paid on December 2020 to shareholders of record on November 16, 2020. The quarterly dividend will result in a current yield of 14.1% based on Friday's closing price of $1.99. Before the Q3 2020 dividend payment of $5.5 million, the NCM, Inc. balance sheet of $62.9 million allows to pay dividends for nearly three years, regardless of any cash being distributed to NCM, Inc. from NCM, LLC. Due to the shift in many big movie titles into 21 and 22, movie release schedules are packed full of great content that's being enjoyed on the big screen, and with movie production starting back up, those schedules should begin to fill in even more. Given the ad sales momentum we experienced earlier in the year and our recent sales activity, we're confident that once theater operations normalize, cinema will continue to be an important part of brand marketing plans going forward. And with cabin fever getting worse every day, we're confident that moviegoers will return to the cinema as new films are released. Cinema is one of the ultimate forms of escapism and has a long history of resilience, especially during tough times. While uncertainties related to the COVID-19 pandemic remain, We have positioned our company well and have good reason to be confident about NCM's future as we continue to effectively balance the two priorities of maintaining strong liquidity and executing on a sales and operating plan focused on staying connected with our existing clients and selling the marketing power of the big screen to even more brands. I'd like to thank everyone on the NCM team for their continued commitment, support, hard work, and resilience. I'm especially thankful for the strength and support our executive leadership team are theater circuit partners as we manage the ups and downs of 2020 together. So thank you, and I'll turn the call to Ted to discuss our financial picture in more detail.