National CineMedia, Inc.

Good evening and welcome to the National CineMedia, Inc. Q2 2021 Earnings Conference Call. All participants are in listen-only mode. Should you require assistance from a conference specialist, please press star followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press the star key followed by the number one on your telephone keypad. Please draw your questions. Please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ted Watson, Senior Vice President, Finance. Please go ahead.

Thank you, Kaylee. Good afternoon. 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 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 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 second quarter 2021 earnings call. I hope that you're all continuing to stay safe and are having a happy and healthy summer. During the call today, I'm going to provide a high-level update on our recovering cinema advertising business and the ongoing steps we've continued to take to balance cost containment with the need to quickly restart our business. I will also provide an update on our strategy to diversify and strengthen our marketing product offerings by expanding our online presence and consumer databases and analytics and increasing our reach and impression base from other out-of-home venues. Ted will then provide more details about how we are managing our operating costs and our overall liquidity. And then, as always, we'll be open for questions. Summer movie-going season is in full swing. and we've been very encouraged by the way advertiser demand has picked up with the box office success of several new releases. The strong openings of A Quiet Place, Fast and Furious 9, Black Widow and Space Jam have all demonstrated that there's a significant pent-up demand to return to the communal big screen experience of the movie theater. Even films like Black Widow that have opened day and date with the streaming service have attracted large cinema audiences. With a very crowded film release schedule for the remainder of the year, The highest percentage of movie theater locations opened as the pandemic began in March 22 and our Ad Commandment book building. We are very optimistic about the rest of 21 and 22. While the various release strategy experience of traditional Hollywood studios and new tech video content produced continues to play out, there are strong signs emerging that lead us to believe that an exclusive theatrical window remains the best approach for content producers. Two of the highest domestic grossing movies of the year, Quiet Place 2 and F9, were released exclusively on the big screen. Positive Press and other PR about the success of the cinema openings cost the producers nothing, yet has created huge incremental awareness that is also expected to provide meaningful marketing benefits in the upcoming streaming and other release windows. Combined with consumer awareness benefits and the significant lost revenue due to streaming-related piracy, We believe that it's becoming increasingly clear that studios are leaving money on the table with the day-and-date streaming strategy. These realities may underlie recent announcements by many studios, including Warner Bros., that they'll maintain or reconsider an exclusive cinema release window for all or some of their films in 2022. There's also been a recent experimentation with an exclusive cinema release window by Netflix for certain of their feature-length films. This could be a trend that expands to other companies that have recently entered the streaming business. For the first time since the COVID-19 pandemic began in March of 2020, film release schedules have begun to normalize. Nearly all movie theaters have reopened and cinema audiences have begun to return. And most importantly, so too have our advertising clients. At the end of Q2, 97% of the theaters within our network were open and a robust motion picture release schedule was in place. A stark contrast to the bleak conditions at the end of Q2 of 2020. As U.S. movie theaters begin to reopen and capacity restrictions begin to be lifted in all major metropolitan areas during Q2, the number of ad impressions available to sell to our clients began to increase, resulting in a small amount of in-theater revenues versus none in Q2 last year when theaters closed. While our Q2 revenue was still significantly below pre-pandemic levels, The trends are encouraging as future marketing budgets are starting to be allocated to cinema, now that clients can see for themselves that our valuable, young, engaged movie audience has been trending towards critical mass once again. The sales momentum reflects all the hard work of our sales team over the past year as they've kept cinema advertising and NCM in particular top of mind with advertisers, even though we've had very few high-quality cinema ad impressions to sell. Maintaining these client and agency relationships during the pandemic has paid significant dividends during this year's TV network upfront that are in their final stages. We've already completed numerous upfront commitments and are actively engaged in finalizing many other negotiations with major advertisers for marketing campaigns that will cover the broadcast year beginning this October. Approximately half of our top 20 upfront partners from 2019 are back and have closed deals with us for 2021. was another 25% expected to return to our screen by the end of Q3. We also continue to have promising discussions with many other new and existing clients across a wide array of key categories, including QSR, telecom, auto, entertainment, CPG, technology, finance, insurance, retail, and others. The upfront market demand that we're seeing may also be related to some changes in consumer TV viewing behavior behind caused by the pandemic. High-quality video GRPs are becoming harder for marketers to find as TV consumers begin to favor SVOD versus ad-supported television. This reduced ad-supported TV viewership combined with continued aging of the traditional TV audience is forcing ad-supported TV networks to increase pricing to secure the same level of upfront commitment. This creates a real opportunity for us as marketers must find their premium video GRPs elsewhere and our CPMs are, in fact, more competitive. There also appears to be less excitement about the new fall TV programming schedule from the media buying community as COVID-related production issues have reduced the number of new shows premiering on linear ad-supported TV and networks have begun to put more of their programming message behind series that will help them grow the subscription base of their emerging streaming networks. This puts cinema in a very strong position with a crowded film slate for the rest of this year and well into 2022. While the recent news of the increase in new COVID cases, including the spread of the Delta variant, recent news regarding vaccine mandates working on the potential market, potentially stricter COVID projections in the future may impact box office attendance and advertiser sentiment, but we remain excited for the box office later in the year. And box office estimates for Q3 and Q4 of 21 continue to be very positive for the major upcoming films set for release, including Shang-Chi and the Legend of the Ten Rings, The Next James Bond Movie, No Time to Die, Halloween Kills, Dune, Ghostbusters, Afterlife, Top Gun, Maverick, Spider-Man, No Way Home, Sing 2, and, of course, The Matrix 4. In addition to the recovery of our core cinema ad business, we're also making good progress on our strategy to create more robust consumer analytics data base and unique ways to bundle our highly coveted theater audiences with online impressions from our new and expanding digital platforms, and other consumers that visit our other digital out-of-home partner locations. These new integrated marketing offerings will allow advertisers to engage movie fans anytime and anywhere. Throughout the COVID pandemic, our newbie digital ad offerings continue to attract new advertisers. In addition to our owned and operated digital products and apps, we're continuing to execute on our plan to integrate with world-class consumer tech platforms including YouTube and TikTok through exclusive partnerships that allow us to sell advertising alongside the compelling entertainment content that our Gen Z and millennial audiences love. Our advertising on YouTube is an ideal example of a complementary digital expansion, as we are now working with brands like Farm and QSR categories to run their ads alongside premium, brand-safe movie content like trailers and fan-favorite movie clips online across the top social video platforms, which included a seven-figure deal in particular in Q2. We've just also started a new TikTok custom social influencer offering that we've developed in a unique partnership with a digital specialty group, Rad Intelligence. We anticipate that this new offering will be particularly successful on the local side as it gives our local team an easy and affordable way for small business advertisers to participate in one of the world's biggest social platforms through NCM and to bundle it with our on-screen ads to create a powerful marketing bundle to reach young consumers. Our digital offerings also provide valuable consumer data. Our ultimate goal is to become the premier source of movie-related consumer data. As such, we have increased our focus on the aggregation of highly valuable consumer data. We collect both from our consumer-facing apps, such as Newbie Trivia and Newbie Arcade, and also from movie ticketing data in partnership with the founding member exhibitor. These important movie ticket audience data sources are expected to grow our data sets to 300 million by year-end, will greatly expand our ability to create more robust targeting solutions for advertisers and to create custom closed-loop attribution measurements for brands. Our growing industry position as the movie audience experts will put us in an ever-stronger competitive position with TV and larger digital advertising platforms and is an important part of supporting our premium CPM value proposition. We're also continuing to expand our new digital out-of-home group. which was created to allow brands to access a unique combination of theater audiences and consumers in a variety of venues like supermarkets, convenience stores, restaurants, and office buildings. Although this is still very much an emerging business for us, we're seeing a growing pipeline of commitments from brands and categories including CPG, healthcare, education, professional and financial services, government, travel and tourism, and insurance. We also recently expanded our digital out-of-home network to include some exciting new venues, including our new newbie on-campus network, powered by True, which offers brands a unique way to reach young Gen-T movie fans and point-of-market entry consumers in college and university campus locations where they spend the most time, including high-traffic, non-academic commercial spaces such as campus retail and bookstores, student centers and cafeterias, and athletics and recreation areas. We're also exploring new entertainment marketing arenas with an exclusive e-sports advertising and content monetization agreement and e-sports community aggregator to create new ways for brands to capitalize on that cultural phenomenon. As we mentioned during our Q1 call, our new digital out-of-home and digital social video platform inventory also provides us with two initial entry points into the programmatic buying marketplace, which is an important step in our strategy to make all our NTM offerings easier to buy. Our capital investments in our new cinema advertising management system that was launched in Q1 is laying the foundation for programmatic access for our on-screen inventory as well, which we expect will create higher inventory utilization and other monetization opportunities for our in-theory inventory in the future. And while we're still in the early days of this recovery, as local multiplexes begin to sell out auditoriums showing the new film opening, it's clear that consumer demand for the cinema experience continues to be strong. and as previously described, there are also signs that marketer demand for our high-quality video GRPs may be on the rise as TV2 finds. While our business recovery is clearly underway and revenue levels and related accounts receivable balances are beginning to build, our monthly cash flow burn rates remain elevated and there will be working capital timing differences associated with the payment of operating and debt service costs and collection of ad sales accounts receivable. Thus, We've implemented initiatives to manage our liquidity, including approval from our board and founding members of a short-term revolving debt facility between NCM Inc. and NCM LLC to bridge short-term working capital deficits that Ted will get into more detail shortly. We're also continuing to balance the need to continue certain cost reduction measurements with the need to keep our talented NCM team in place and motivated to quickly ramp up our business as advertiser demand increases. Our sales teams are now back to full strength, and we've brought back some furloughed staff that are needed to support the increased contract volume levels. We've begun to reinstate some of our temporary pandemic salary reductions. We also expect to implement a return to office plan for our Denver corporate office and regional offices in Los Angeles, Chicago, and New York City shortly. I know that these staffing plans may not be happening as quickly as all of us would like, So I remain very grateful to our entire NCM team for their incredible resilience, dedication, and support. NCM has not only survived the worst of the pandemic because of everyone's hard work, the company is very well positioned for success in a post-pandemic world. I also would like to acknowledge the support of our board, our exhibitor partners, and our advertising clients and their agents, and sincerely thank them for their continued support as we begin to emerge from this historic time together stronger than ever. While uncertainty related to the COVID-19 pandemic remains, we believe that we're well positioned to reestablish the growth momentum that we had created before the pandemic started. We look forward to a continued recovery through the remainder of the year and to much better times ahead. So with that, I'll now turn the call over to Ted to discuss more details about our financials, cost-saving measures, liquidity position, and outlook. Ted?