National CineMedia, Inc.

Greetings and welcome to the National CineMedia, Inc. Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ted Watson, Senior Vice President of Finance. Thank you, sir. You may begin.

All right. Thank you, Victor. Good afternoon, everyone. I am joined today by our CEO, Tom Lesinski, and 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 and Exchange Act of 1934 is 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 our investor relations page of our website at ncm.com. Now, I'll turn the call over to Tom.

Thank you, Ted, and good afternoon, everyone. Welcome to our fourth quarter and full year 2020 earnings call. I hope that you're all continuing to stay safe and healthy and that you're as cautiously optimistic as we are about the positive impact of the COVID-19 vaccine rollout. We continue to be confident that once the vaccine rollout achieves critical mass Later this spring and early summer, people will flock back to the movies after a year of being locked down. Today, I will provide a high-level update on steps we've been taking to not only enhance our liquidity position, but also to expand, diversify, and improve our business, despite the ongoing challenges presented by the COVID-19 pandemic. With our recently announced bank facility amendment, that has provided covenant relief through Q3 2020 and a new $50 million debt facility which will provide additional liquidity for the company to continue to execute on its growth initiatives, we believe we are very well positioned to weather the waning months of the pandemic. Ted will provide more detail on how we continue to manage our expenses and our overall liquidity that will allow us to continue to navigate these extraordinary times and to ensure that the company is ready to quickly benefit from the return of movie audiences that will now start in Q2 as new films begin to get released. And then, as always, we'll be open for questions. Looking back on the fourth quarter of 2020, it should come as no surprise that it continues to be a challenging time for our business and the entire out-of-home entertainment and advertising industries. As of the end of December, 60% of our theaters in our National Cinema Advertising Network remained closed due to state and local COVID-19 restrictions and many continue to operate under reduced operating hours, resulting in significant declines in Q4 network attendance, revenue and adjusted EBITDA that Ted will discuss in more details in a few minutes. When the global COVID-19 crisis began in March, our business was beginning to grow again and we had just increased our dividend and we were in a very strong liquidity position. This financial strength and our highly variable cost structure combined with the significant cost cuts and cutting measures we instituted shortly after the pandemic began in the U.S. enabled us to not only absorb the impact of COVID-19, but we also made significant progress on our strategic initiatives in 2020 as we expanded our cinema advertising network and took meaningful steps toward diversifying our business into new out-of-home entertainment venues. Despite this significant decline in our network attendance, several major national clients have remained with us through the pandemic. While this is obviously encouraging, it may also reflect a broader market trend that could be meaningfully beneficial to our business in the future. As consumers have shifted their TV viewing to subscription-based streaming services, there are now less GRPs available on TV, creating a favorable supply and demand economic benefit for NCM. As demonstrated by the recent Super Bowl ratings, even a higher quality sports program may be finding it more difficult to attract our core younger 18 to 49-year-old audience. Top brands in key categories including insurance, QSR, digital and streaming services, retail, CPG, gaming, automotive, and alcohol beverages have continued to run on screen in our movie pre-show in those areas of the country where theaters are still open. It's clear that advertiser demand for cinema continues to be strong. The limiting factor for us is movie audiences. We continue to be confident that once government-mandated restrictions are lifted and the rollout of the vaccine progresses, The significant cabin fever that has been building for a year will drive consumers back to the theaters, allowing movie studios to rely on theaters once again to be the primary launching pad for their films. Since the pandemic began, the studios have delayed the vast majority of their theatrical releases. Those films that have opened in streaming services exclusively or are day and date with cinema have not benefited from the huge marketing and PR provided by a broad theatrical launch. I'm confident that once the major market theaters reopen and audiences return, film producers will once again take advantage of the powerful marketing and PR launch platform that cinema provides. This will also significantly reduce the risk of piracy that accompanies an initial online release. We're very encouraged by the recent announcements that theaters can begin to reopen in major cities, in particular New York City, that can now reopen to 25% capacity. Based on the proprietary behind-the-scenes panel of 5,000 movie fans, we know that audiences want to get back to the big screen as soon as they feel it's safe to do so. Our research shows there's already been a steady return to movie theaters, with 43% of respondents saying they've been back to the movies since the original theater closures last spring. And those respondents said that they've been back to the movies an average of 5.4 times during the pandemic, consistently reporting an overwhelmingly positive and safe movie-going experience. Based on what these movie fans continue to tell us, moviegoing is trending in a positive direction. 92% said the news of a COVID-19 vaccine would positively impact their moviegoing outlook. 88% said that the shortened theatrical window has no negative impact on their desire to watch movies in theaters. And 90% agreed that the quality of the movie-watching experience is far superior in a theater versus at home, particularly according to those who recently saw Wonder Woman 1984. In addition to our own internal research, one can look at the return of moviegoers abroad, particularly in China, Japan, and South Korea. If the content's available, people will come to the theater. Look no further than the opening day box office in China for Detective Chinatown 3, grossing a greater than expected $163 million in sales, beating the previous record set by Avengers Endgame in 2019. Until the theater audience has returned, We have continued to aggressively focus on maintaining a high level of liquidity. The cost reduction measures that we've instituted, plus our current cash balances, including the new $50 million debt facility, will ensure that we have sufficient liquidity to operate our business for the next 12 to 13 months without considering the benefit of any revenue beyond the rollout of the vaccine and return to positive cash flow. As discussed on previous calls, beginning in March 2020, we took significant steps to cut costs and reduce operating capital expenditures. Then in November 2020, as the pandemic persisted and there were additional delays in movie releases, we took additional steps to reduce costs, including reimplementing a combination of temporary furloughs, permanent layoffs, and further salary reductions. In early January of 2021, with the COVID-19 surge following the holidays, we reinstated up to 50% salary reductions for almost all employees and implemented additional temporary furloughs and further salary reductions. To date, over a third of our headcount has been permanently eliminated or on furlough since the start of the pandemic. Over 20% of our current headcount is on reduced work schedules of 50 to 60, and almost all remaining employees are at salary reductions up to 20%. Those cumulative measures reduced our actual total Q2 to QV 2020 run rate cost by 50% versus the same period in 2019, and by 52% versus our pre-COVID run rate. As we continue to evaluate the short and medium-term needs of our business, we've been very focused on also ensuring that we do not permanently impair our business, including make sure that we retain a high-quality team so that we are ready to quickly return to a normal operating level when theater audiences return. We've also continued to strategically make capital investments, most notably in our new cinema advertising management system that was launched last month. This new inventory management system will provide a more efficient, seamless sales process which will allow us to better compete with other video and digital ad platforms. This new streamlined end-to-end process is expected to result in significant cost, revenue, and other efficiencies for NCM, including more efficient pricing and inventory placement, resulting in reduced make-good obligations and an expansion of our client base. Our new system also lays the foundation to develop a solution to sell our theater inventory programmatically as we do now with our digital inventory. creating additional monetization opportunities in the future. We've also continued to expand our cinema advertising network with the recent announcement of a new long-term network affiliate agreement with the Harkins Theater Circuit. Harkins is one of the premier movie exhibitors of the Western U.S. and the fifth largest exhibitor in America. With the addition of Harkins theaters in May of this year, NCM's national theater network will include all the top five exhibitors in the country. Our newbie pre-show entertainment program will now be seen by millions of additional movie fans across the Southwest and over 500 Harkins screens in 33 premier theater locations in Arizona, California, Colorado, and Oklahoma. Harkins' industry-leading and growing attendance per screen, in addition to its state-of-the-art theaters and key markets, enhances our already strong national media network and will particularly boast our coverage in Phoenix, the number 11 DMA. Harkins joins NCM's network at an optimistic time in both the movie and advertising industry. The 2021 film slate is stacking up for a big summer, fall, and holiday movie season following the COVID-19 vaccine rollout. Meanwhile, as mentioned earlier, younger audiences are continuing to abandon ad-supported television, and audiences of all ages are eager to go off the couch and get back out to the movies. For brands seeking to reach the highly sought-after 18 to 49 and 18 to 34-year-old audience demographic, cinema is an attractive TV GRP replacement. During the pandemic, we've also made significant progress in our strategy to diversify our media inventory in ways that are complementary to our core cinema business and strengthen our unique bundle of onscreen and digital advertising products. In October of 2020, we launched our new National CineMedia Digital Out-of-Home Group, which was created to further unite brands with the power of movies by extending movie-centric entertainment, content, trivia, and advertising beyond theaters to a variety of complementary out-of-home venues. Our unique bundle of out-of-home advertising products will be sold by our existing high-quality sales force, creating many selling and operating cost benefits. Our initial partners that we've recently announced include some of the top out-of-home networks in the space, including Captivate, a leading location-based digital video network with screens in premier office and residential properties, CoinStar with the new AdPlanet screens that sit atop CoinStar kiosks and grocery stores, and Zeos, the industry-leading technology platform for guest entertainment and engagement in restaurants. And we're also continuing to pursue partnerships with other networks in retail locations nationwide. This new high-quality out-of-home and media inventory gives us over 1 billion additional impressions available for our existing sales force to sell monthly and allows us to package the strengths and effectiveness of cinema, digital, and these new out-of-home venues together to create innovative, integrated campaigns for brands that engage movie fans beyond the big screen. All these new out-of-home relationships also provide us access to additional first and second party consumer data that will enhance the nearly 171 million data sets in our current consumer database. This consumer data is critical currency in today's highly competitive media environment that we can utilize across all of our advertising platforms. Audience data drives ad revenue and increases our ability to deliver the kind of targeting and attribution that our clients demand. The fact that we've been able to continue to generate revenue from our digital business and deliver movie audiences to our brand partners across other complementary mediums while theaters have been closed is directly due to our ability to leverage our unique first and second party data. This continued growth in our consumer databases combined with the capabilities of our recently launched new inventory management system will position us well to provide marketers with an even stronger, unique bundle of advertising products. During the COVID-19 pandemic, our sales teams have been tirelessly working to keep cinema and NCM top of mind in the marketplace. Our local sales team has also done a great job of shifting in-theater advertising commitments to our digital platforms, as reflected by our Q4 digital business growing 24% over Q4 2019. As a result of all this hard work, media buyers remain enthusiastic about the cinema that will include many great upcoming films and the unique advertising opportunities that we have to offer that have become even stronger since the pandemic began. I'm very proud of the job that our entire NCM team continues to do under very difficult circumstances. I'd like to thank them, our board, and our exhibitor partners, again, sincerely for the continued support as we navigate this historic and turbulent time together. Finally, because of the pandemic continuing into spring 21 and the extension of our bank amendment waiver through Q through 22, our board of directors has trimmed the NCM Q4 dividends slightly from $0.07 to $0.05 per share. This will allow adequate cushion for funding the dividend while available cash distributions from NCMM LLC is restricted during the bank amendment period. The dividend will be paid on April 5, 2021 to stockholders of record on March 22, 2021. This quarterly dividend will result in a current yield of 4.2% based on Friday's closing share price of $4.75. Before the Q4 2020 dividend payment of $3.9 million, the NCM, Inc. cash balance of $57.9 million would allow us to pay dividends well beyond our business recovery period, regardless of any cash being distributed to NCM, Inc. from NCM, LLC. While uncertainties related to the COVID-19 pandemic remain, we believe that we have positioned our company well and have good reason to be confident about our 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 bringing the unparalleled marketing power of the movies to even more brands and finding new ways to engage movie fans anywhere and everywhere. I'll now turn the call back over to Ted to discuss our financial picture in more detail. Ted.