Q3 2020 National Cinemedia Inc Earnings Call
Greetings and welcome to the National Cinemedia Inc.
Q3, 2020 earnings conference call at this time, all participants are in listen only mode. A question and answer session will follow the formal presentation, if anyone should require operator.
Radar systems during the conference. Please press Star Zero on your telephone keypad. Please note that this conference is being recorded.
I'll now turn the conference over to our host Mr., Ted Watson Senior Vice President Finance. Thank you Sir you may begin.
Thank you Diego good afternoon, everyone I am joined today by our CEO Tom Zinski.
Well, we get started I would like to remind our listeners that this conference call contains forward looking statements within the meaning of section 27, a Oh the Securities Act of 1933 as amended and section 21 E of the Securities Exchange Act of 1934 as amended all statements, including our discussion about the future impacts a cold at night.
Team 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 companys filings with yet.
He see 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 Dot 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 in the world and I'd like to once again, thank everyone for their ongoing support of NCM.
We work hard to stay safe and help protect our loved ones are colleagues in our community.
Today, I will provide a high level update on what Weve 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 detailed how were managing our expenses and overall liquidity to navigate these extraordinary times and to position the company to benefit when movie audiences returned in larger numbers to our general 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 theatre reopening.
Well, we had an additional positive step forward with the release of the film tenant in early September.
First tent pole films released after the good start to the COVID-19 pandemic when that film performance below expectations Studios shifted other big titles into 2021.
When tenant open 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 or open many with restricted operating schedules.
Well, we have a limited control over some of the factors impacting the cinema business, we do have control over our spending levels in 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 or advertising products and nurturing our many close client agency relationships.
Due in part to our efforts there continues to be strong demand from several of our core advertisers, including Amazon bars Turner Progressive Ford 18 to get high and again, we're all back up on the big screen for the opening of tenet.
In fact, Wendy unusual position with the limiting factor to our revenue is not advertiser demand. It's the impressions were able to deliver as that remains is adversely impacted by state and local theater operating restrictions.
Cobot 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 movie going experience buyer sentiment partnership steps, they're taking to make the theater experience safe.
We continue to survey our proprietary NCM behind the screens panel the movie fans.
And 93% reported that they had a great first trip back to the local movie theater.
They rank their experience at the movies higher than any other out of home activity and thanks to the exhibition industry is extensive cinema safety, it or safety and cleaning protocols concerns about health are 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 adds in fact over digital TV out of home and print ads.
Based on.
Our own research on the success of box office, returning to pre cobot 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 tent pole movies are released and the vaccine becomes available broadly.
[noise], 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 in platinum spot revenue sharing payments are all primarily driven by attendance active screens into revenue and these costs have been significantly reduced her periods that theatres were closed and will continue to be reduced for the period of time that attendance was 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 returned to positive cash flow in theaters attendance begins to normalize.
As we pre leased to discuss beginning in March when the pandemic started to force theater closures. We immediately took steps to preserve liquidity and quarter operating cost send it back to the 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.
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 Tennant.
Since that time.
Cinema industry conditions have continued to remain fluid with shifting movie titles in theater closures. We are now re implementing furloughs and temporary salary reductions for over 30% of our workforce that on an annualized basis, we'll save $8.1 million.
In addition to this we have to undertake a 20% reduction in force that result in annual savings of approximately $11 million together. These represent an impact to 50% of our pre covered workforce.
As we continue to evaluate the short and medium term needs of our business. Our goal is to remain flexible. So we dropped permanently impair our business such that our longer term plans cannot beat we initiated quickly 'cause 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 cobot pandemic.
[noise] NCM LLC currently has a cash balance of approximately $137.5 million and 7.5 million receivable balance that should continue to build through the remainder of 2020 to 21.
We currently have a cash monthly burn rate of $11 million, including our debt service cost.
This monthly burn 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.
At all the theaters close again, we can very quickly scale, our monthly burn rate back to the past summer levels of nine Tonight and half 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 and 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.
Well, we enter 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 of 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 20 Threerd.
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 are hopeful that the New York opening will be a catalyst that will lead to the opening of L. a county in New York City at a more normalized film release schedule consume follow.
With the cinemas a lot to reopen in film releases potentially starting to build at the end of Q4 and the 21. We have remained active in the 21 upfront marketplace in order to ensure that we have a solid 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 sentiment and see on top of their mind with our clients and agencies.
Clients remain enthusiastic about the many great upcoming films and unique advertising opportunities like our premium platinum and lifestyle in inventory that we began to offer late last year.
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 at 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 separately the severely limited impression base available currently on our network and 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, 2018, and 2019 with major titles, including Gossip Ghostbusters. The James Bond movie No time to die fast and furious nine black widow got so low versus Kong Topcon Maverick doing the attorney goals. They read the Franklin biotech research.
Okay, fantastic beasts, and where to find that mission impossible seven.
Steven Spielberg's West side story and of course matrix for.
It's also important to note that while tent pole films are a critical driver of send them attendance. Many smaller films are continuing to open and some are performing better than expected because they're receiving more consumer attention and screen time.
[noise], although third quarter national regional and local on screen advertising when it was limited.
To the last three weeks of the quarter, we continued benefit from our digital business in particular, our local sales team continues to successfully shift onscreen commitments to our digital platforms. During the period when theatres were closed.
Our ability to continue to generate revenue from our digital businesses, while theaters have been close demonstrates our ability to leverage our unique first and second party data and.
Inclusive of nearly a 150 million datasets and growing.
This ability to deliver a moody odds to to our brand partners allows for marketers to leverage and engage our valuable audiences, even when theater audiences are more limited.
The stronger digital offering positions us well as movie launches 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 all 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. It's imperative given all the new digital options available to markers that we make our products easy to buy.
To that point, we now sell digital inventory programmatically and will soon begin development on a solution to sell around the screen inventory program and 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 OTI tea 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.
Our board of directors.
Has left the NCM dividend of seven cents per share unchanged for the third quarter.
The dividend will be paid on December 2020 to shareholders.
Of record on November 16th 2020.
The quarterly dividend will result in a current yield of 14.1% based on Friday's closing price of $1.99.
Before the Qt 2020 dividend payment of 5.5 million P. NCM Inc. balance sheet of 62.9 billion allow us 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 put on the big screen and with movie production, starting but starting back up those schedules should begin to feel and even more.
Given the AD sales from mentioned, we experienced earlier in the year and our recent sales activity. We're confident that once theater operations normalized sentiment 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 movie goers will return to the sentiment has new films are released.
Cinema is one of the ultimate forms of escapism has a long history of resilience, especially during tough times.
[noise] well uncertainties related to the COVID-19 pandemic remain we have positioned our company well and have good reason to be confident about and seems 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, but the big spring to even more.
Our 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 Our theater circuit partners as we manage the ups and downs of 2020 together.
So thank you and I'll now turn the call to Ted to discuss our financial picture in more detail.
Thanks, Tom as Tom mentioned, while the impact of the COVID-19 pandemic on our business has lasted longer than we had initially anticipated our liquidity position remains strong and we continue to actively participate in the advertising marketplace.
With our network theaters closed where most of the third quarter and in fact, 47% still close we only recorded $6 million of revenue in Q3.
Given the significant impact of the COVID-19 pandemic on our business an analysis of our revenue and adjusted EBITDA versus prior periods was not meaningful as the current results do not accurately represent our ongoing business.
Therefore, I will focus most of my comments today on our current liquidity position and monthly cash flow burn rate and related efforts to reduce monthly operating expense and capital expenditures without negatively impacting the longer term prospects of our business.
Due to a lack of any meaningful in theater advertising revenue total Q3, adjusted OIBDA was a negative $11.2 million the.
The combination of our highly variable operating cost structure, and our proactive overhead cost reductions allowed us to limit our adjusted EBITDA losses during a period, where our network attendance was very low in fact during Q3, our average monthly pro forma cash burn rate was approximately $11 million per month.
As theaters began to reopen in August in anticipation of tenet, we began to bring essential employees back from furlough. So that we could begin to schedule ads and distribute our newbie advertising pre show.
And then when subsequent movie release, it began to be further delayed into 2021 and.
Letters began to re close we decided to furlough additional personnel or in some cases reduced work schedules and salaries by up to 50%.
These additional cost reduction measures that reduced our core operating expenses in Q4 to approximately $5.3 million per month.
Compared to our pre cobot run rate of nine and a half million dollars per month that is a savings of 44%.
When combined with our debt service obligations, a nominal capital expenditures, we are averaging total cash outlays of approximate approximately $11 million per month before the net benefit of any revenue.
Our gross margins on revenue increased rapidly as revenue builds and Dallas, we estimate operating cash flow breakeven after debt service when our quarterly revenue reaches approximately 45% 2019 levels.
After a strong two and a half months to start the year. Our total 2029 month revenue was $74.7 million versus $297.6 million for the first nine months of 2019 adjust.
Adjusted OIBDA decreased to a negative nine and a half million dollars from $124 million in the first nine months of 2019.
Again, all driven by changing industry conditions, including temporary theater closures in response to the COVID-19 pandemic.
For the third quarter, we reported a GAAP loss per diluted share of 16 cents versus an earnings per diluted share of 12 cents in Q3 2019 and for the nine months of 2020, we reported a GAAP loss per diluted share of 39 cents compared to an earnings per diluted share of 22 cents in the first nine months of two.
Many 19.
Earnings decrease was again were the result of the Coke at 19 pandemic.
For the first nine months of 2020 capital expenditures were $7.9 million versus 10, and a half million dollar spent in 2019 due to a halt of all non essential capital spending total capital expenditures are now expected to be approximately 10, and a half million dollars in 2020.
A significant part of our current capital spend relates to investment and ourselves planning and inventory management platform that was in the testing phase when cobot nineteens yet though.
This should allow us to launch the system in Q1 of 2021.
We believe this inventory management system as a critical part of our plan to improve the quality of our in theater advertising product and increase the efficiency of inventory placement by reducing lead times and making it easier for advertisers to buy or product.
We also expect to be able to reduce made good liabilities and personnel costs.
In fact, the implementation of this new system is expected to reduce our operating overhead by approximately $8 million per year from our historical run rate of a couple of years ago and $1.2 million per year from our current run rate today that already reflect staffing reductions we have undertaken over the last 18 months.
By continuing to invest in this initiative during the COVID-19 pandemic, we will accelerate the remaining expected cost savings into Q4 of 2020.
In addition to the cost savings. We are also expecting revenue benefits as the buying and scheduling process becomes more integrated and seamless.
And the time from sales to air is expected to reduce the 48 hours or less.
[music].
In the third quarter and for the first nine months of 2020, we recorded $0 and 1.4 million respectively of integration and other encumbered theater payments, primarily from AMC Carmike theatres.
Versus $5.6 million and $13.7 million, respectively last year.
AMC integration payments are based on what NCM could have earned had those theaters been part of our network.
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 and adjusted EBITDA as they are recorded as a reduction to 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 Q3 2020 was 896 million versus 895 million at the end of Q3 2019.
Our average interest rate on all debt was approximately 4.9% at the end of Q3 compared to 5.7% in Q3 2019, including our 265 million floating rate term loan bank debt and revolving credit facility that had a rate of approximately 3.6% excuse.
Looting revolver balance is 70% of our total debt outstanding at the end of Q3, you had a fixed interest rate.
As mentioned on our earnings call last quarter in anticipation of the impact of the pandemic and the related theater closures on our 12 trailing four quarter covenant calculations.
In April we obtained a senior bank facility waiver or NCM LLC net senior secured and total bank debt leverage covenants through the quarter ended July Onest 2021.
The NCM LLC bank debt Covenant waiver included a requirement to maintain a minimum liquidity of $55 million, including cash and availability under our revolver.
Also during the waiver period, NCM LLC will be prohibited from distributing to the founding member theater circuits or NCM Inc. Ginny if its available cash as defined in the LLC operating agreement on love certain conditions are met.
We are currently in all our debt obligations and expect to be for the foreseeable future. We will continue to work with our bankers to ensure that we remain in compliance with our agreements.
NCM LLC its current cash balance was 137.5 million plus seven and a half million and accounts receivable, assuming our average nine to nine and a half million per month cash burn rate after debt service payments when theaters workflows last summer and we're not recording any in theater revenue.
We have the liquidity runway of 15 months before the consideration of the bank debt liquidity minimum financial covenants.
With our network currently open and running the pre show we have a current cash burn rate of approximately $11 million per month before the benefit of any revenue.
With our high operating cash flow margins in revenue expected to continue to build in Q4 and into 2021, we believe that the 15 month liquidity runway could be greater.
Also as mentioned, we need revenue to equal approximately 45% of 2019, the breakeven on a cash basis after debt service.
As Tom mentioned, our board of directors authorized NCM inc. to keep its quarterly cash dividend of seven cents per share a common stock.
The recent bank waiver currently prohibits distributions to members, including NCM Inc. and the new limitations remain through the quarter ended July Onest 2021, unless certain financial conditions are met.
Even with no additional NCM LLC distribution do NCM Inc. NCM Inc. has enough cash to pay its current dividend for nearly three years.
The company intends to pay a regularly quarterly dividend for the foreseeable future at the discretion of the board of directors consistent with the company's intention to distribute overtime substantially all its free cash flow.
The nearly three years of dividend cushion is considerably longer than we have historically targeted we will continue to monitor this cushion and related dividend level does theaters reopened and we get a better read on the level of theater attendance and theater advertising revenue.
Therefore, 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 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 short and long term impacts to the company related to the COVID-19 pandemic and restrictions under the NCM LLC credit agreements.
Finally, consistent with our comments over the last two quarterly earnings call. We do not have enough visibility into the timing of film releases related theater openings and network attendance to provide reliable future revenue and adjusted OIBDA guidance.
We will only begin providing revenue and adjusted OIBDA guidance, when we have access to more reliable information regarding these key market data points.
With that this concludes our prepared remarks, and we will now open up the lines for questions operator.
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Thank you Stan buys we poll for questions.
Our first question comes from Matt So up with Baird. Please state your question.
Yeah, Hi, guys could you talk a little bit about how you're thinking about the rest of your capital structure as things go forward Ted.
That is there any ability to talk to your bondholders about exchanges or or other ways to reduce the total amount of debt outstanding.
Yeah. There are certain options that we can consider I don't want to get into details at the moment.
I would tell you that we feel good about our liquidity situation as it is today.
Probably more focused on the the technical cutting heads of the leverage ratio but.
But I'll just leave it there I I won't rule anything out, but I also don't want to get into any details.
No that's fair.
Could you talk you mentioned talking to your bank lenders potentially about further amending your facility there.
How would you go out for another couple of quarters. Another year, how long are you thinking about.
Yes, you know again math to be determined.
We will work with our banks to determine an appropriate level of what what an extension might look like.
It's just again too early to get into details yet.
Yeah, no I completely understand.
And then just on the cash and a our balance you gave what does that is that as of the end of October or what was that day. The 137.5 in the 7.5.
That was as of last Friday.
Got you and the burn is and that in October as the months you pay your bigger coupon right. So that's why the burn for October is a little bit higher that's.
That's correct yes.
Okay and then the number you gave US is the is just the blended rate. If you. If you were to burn at this rate over 12 months.
Yes, that's correct, yes, so the data, obviously fluctuate up or down based on the bond payments.
And smoothing that out to give you kind of per month run rate. If you looked at it over a year right.
No no you guys have been very clear and.
And it looks like you're in as good shape as you could be given these incredibly difficult circumstances. Good luck with everything thank.
Thank you and come out.
Thank you there are no further questions at this time I'll turn it back to management for closing remarks. Thank you. Okay. Thank you.
Just to reiterate we continue to be laser focused on effectively navigating the impact of the pandemic by preserving cash to ensure we maintain a strong liquidity position while at the same time actively working with brands in the 2021 upfront marketplace.
We cannot control the timing of movie releases or theatre openings, we can and will continue to position our business to capture additional market share and work to emerge as an even stronger and more diverse media company the.
The bottom line is that audiences want to go to the movies and advertisers want to reach them into unique highly engaging captive environment that simply cannot be replicated at home.
Once studio release, just released new tent pole films and theaters are open NCM will be there to unite brands with the power of movies and engage movie fans anytime and anywhere.
Once attendance levels begin to return to more normal levels. We believe that we will be well positioned to deliver on the pillars of our growth that we launched last year and once again generate free cash flow growth dividend appreciation for our shareholders as we did prior to the start of the covert crisis.
Thanks, again for joining our call and I hope that everyone continues to stay safe and healthy and I look forward to seeing you again soon at the movies. Thank you.
Thank you. This concludes today's conference all parties may disconnect have a great evening.