National CineMedia, Inc. (NCMI) CEO Tom Lesinski on Q3 2019 Results - Earnings Call Transcript

Nov. 05, 2019 12:30 AM ETNational CineMedia, Inc. (NCMI)
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National CineMedia, Inc. (NASDAQ:NCMI) Q3 2019 Results Earnings Conference Call November 4, 2019 5:00 PM ET

Company Participants

Katie Scherping - CFO

Mark Segall - Chairman

Tom Lesinski - CEO

Cliff Marks - President

Conference Call Participants

Eric Handler - MKM Partners

Mike Hickey - the Benchmark Company

Eric Wold - B. Riley & Company

Jim Goss - Barrington Research


Greetings. Welcome to National CineMedia, Inc. Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

I would now like to turn the conference over to your host, Katie Scherping, you may begin.

Katie Scherping

Thanks Darrel. Good afternoon, everyone. I am joined today here in Denver by our CEO, Tom Lesinski; and joining us by phone is Cliff Marks, who will be available for Q&A later in the call. I'd 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 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 measurement. These reconciliations can be found at the end of today's earnings release, which may be found on the Investor page of our website at

And with that I would turn the call over to Tom.

Tom Lesinski

Thank You Katie and good afternoon everyone. I assumed leadership role here at NCM roughly three months ago with a simple objective to return to our public company roots by delivering a substantial dividend through long-term topline growth, high adjusted OIBDA margins and high-quality earnings as measured by conversion of earnings to free cash flow.

And so after providing you with a few observations about our recent quarter I'd like to share with you our vision for the company moving forward. Then as always Katie will provide more details about results and our 2019 guidance and then we will be open, we open the line for your questions. I'm very excited about the progress that we've been making to transform our business into a more effective, entertainment and advertizing distribution platform that is more data-driven and nimble in today's changing video advertising market place.

With these significant strategic developments in our business all the changes to our ownership and leadership and the recently announced ability to sell ads closer to the feature film we are poised for growth in 2020 and beyond. As we noted on our call in August we got off to a strong start to the third quarter with our pipeline pacing ahead of last year. While we were able to slightly grow our Q3 top-line revenue over last year as our national business continued to perform well we finished the quarter a bit softer than we expected.

A couple of national deals didn't close resulting in scatter revenue well below Q3, 2018, our regional business continued to underperform and/or may could come in higher as a few August and September films underperformed expectations.

As a result our Q3 revenue and adjusted OIBDA came in below our Q3 expectations. our Q3 adjusted OIBDA was also negatively impacted by a $2 million non-cash write-off related to a prior investment we made several years ago which Katie will go over in more detail in a minute.

As we've mentioned advertisers are spending and scatter closer and closer to their airdate other advertising campaigns. While this trend started several years ago as digital platforms rapidly expanded it appears to be continuing to accelerate. Clients now have so many video media choices and thus they can adjust where they place their ads right up to the airdates without the risk of not securing the desired GRPs.

While we're always adjusting the ways we evaluate and risk assess our national sales pipelines we're currently making a significant effort to address this issue and we have a large-scale initiative in the works to upgrade our inventory and sales management systems as well as shift our product sales strategy so we can react more quickly to shorter RFP lead times.

In addition we are expanding our digital inventory and consumer data platforms to make our product more integrated and easier to buy to be in step with all the other digital video advertising platforms that have made media buying easier and virtually frictionless.

The good news is while we lost some Q3 revenue related to this last-minute shift in spending we continue to work with these clients for Q4 placement as well as on a 2020 upfront commitments that are less subject to last-minute shifts.

This will not only keep shifting dollars on our books in many cases it allows us to expand our clients’ overall spend. We've been able to increase the dollar value of our courtesy partner deals for 2020 to sponsor the silence your cellphone's messaging at the end of our newbie show as that segment the show is now closer to the feature film.

We're also receiving positive client responses to our new movie pre-show format with inventory after the advertised show time that we introduced to the marketplace in mid-September which I'll get into great detail on shortly including the sale of our first Platinum 60 Second unit that we will run in December of this year. I would note that the CPM for this platinum spot was at a substantial premium to our historical pre-show CPM. We're also working on several digital strategies that I'll discuss in a minute that are designed to bring more people into the theaters and get them into their seats earlier.

Now that I've gotten through my first hundred days as CEO I'd like to share more details about the five pillars of our strategy that we believe will create significant shareholder value as NCM once again becomes a unique investment vehicle by delivering a substantial dividend driven by long term revenue and free cash flow growth.

The first pillar of growth is related to increasing the quality and value of our media inventory. We’ve recently made a highly strategic and meaningful change in the value of our on-screen inventory with the introduction of the new inventory placement after the advertised show time in our newly pre show in Regal and Cinemark with the completion of the ESA amendment in mid-September.

We are marking the five minutes of inventory that begin at the advertised show time as our quote “Lights Down” inventory. We are also offering the new platinum spot that is deeply embedded near the end of the trailers which we believe is one of the most prized and impactful ad spots in the entire premium video advertising marketplace. These improvements are expected to significantly increase the value of the inventory that we can offer to our national clients. We believe our local and regional clients will also benefit from better inventory placements as replacement will now be closer to the advertised show time.

Well there will be some incremental fixed and variable costs associated with this change given the higher expected sell through an average CPM we expect our revenue growth will drive higher free cash flow available for distribution to our circuit partners and public shareholders.

This higher value inventory combined with an entertaining and engaging pre-show program that is integrated with our newbie digital ecosystem provides a unique cross-platform premium video product that truly stands out in the media marketplace.

Our national sales team has been talking with many high-profile brands and we've already closed a number of deals per [indiscernible] advertising with clients in the QSR, retail, telecom and video game categories. Also as I mentioned I'm excited to report that we just closed our first platinum deal for the month of December with one of our longtime technology clients.

We've also had strong interest in the platinum [inventory] from major clients in the digital media space, technology, auto and apparel categories for Q4 and many other major clients and categories for 2020.

Ad campaigns with this size of media investment commitment are often planned months in advance and the timing of reaching those clients when they're making those investment decisions is a critical. We had hoped to bring our new inventory to the market a little earlier in the year to take a better advantage of the operand marketplace. We were only able to begin selling advertising since mid-September once the ESA amendments were signed. While we were not able to take full advantage of selling Q4 inventory the significant interest we're seeing for both the light stone and platinum [indiscernible] for 2020 is very encouraging.

In addition to this new and improved inventory we are actively working on new ways to reinvent our newbie pre-show program to ensure that it is truly connecting with today's millennial and Gen Z moviegoers to create an in theater experience that will help keep audiences coming back for more as well as drive traffic to our digital properties.

However, these changes and improvements to our media product and inventory cannot alone drive growth. So the second pillar of our strategic plan involves the planned upgrade of our sales planning, proposal and inventory tracking systems to match today's more seamless digital buying experience for our customers to make it easier and faster for advertisers to buy cinema with NCM.

Our company-wide program to increase our operational efficiency and effectiveness with new technology designed to solve the speed to market friction issues associated with our cinema product is underway and we expect full implementation will occur late 2020 or early 2021.

The third growth code that we've been focusing on is the continued investment in creating compelling digital entertainment products that we believe will improve the entertainment value of our pre-show and promote incentives for moviegoers to go to theaters and get to their seats earlier which will in turn create digital ad inventory and a unique cross-platform media product focused exclusively on the highly attractive movie audience through their movie going journey both in theater and online.

Over the last 12 months we've had a 30% increase in the number of clients who had a digital component integrated into their media buy. Also on a trailing 12-months basis over 45% of our national and 26% of our local and regional ad revenue had an integrated digital component.

Integrated campaigns are resulting in a 215% higher contract value versus on-screen alone contracts which is key to a future growth.

We continue to expand our newbie digital ecosystem and user fan and user base of movie fans with NCM owned and operated products like, newbiearcade, newbieshuffle, fantasy movie league and name that movie.

This creates new ways for brands to engage with movie audiences beyond the big screen to reach them anytime, anywhere before and after the movie with new higher margin digital ad inventory and extremely valuable addressable first party customer data that we can monetize through advertising sales and sponsorships as well as leverage our cinema accelerator product.

Growing our digital products feeds into the fourth pillar in our growth strategy which is building a data-driven business. This is critical for us to be able to meet the needs of today's modern video advertising marketplace and we've been on significant data growth trajectory that has taken us from 20 million first and second party data sets at this time last year to 75 million today and we expected at 100 million by the end of this year and we're projecting to double that by the end of next year.

These valuable data sets consists of both our own NCM first party data, from our owned and operated digital products as well as a variety of key second party data addressable consumer records including location-based data that allows us to track when our audiences go to the movie theater to see our newbie pre-show and where they go in the days and weeks afterwards.

This initiative will allow us to retarget audiences with digital advertising to our cinema accelerator product and more effectively support cinema campaign ROI for our advertisers.

With the data platform our team is developing we now know when a movie goer has walked into a theater, what movie they saw and which ads they saw based on that movie and showtime. We can also tell if that movie goer later walked into a car dealership, a cell phone store, a QSR restaurant after seeing these ads on the big screen. This is hugely valuable for all of our brands that are looking to attribute the results of an ad campaign to a customer's behavior. It could also be the key to expanding our business with brick-and-mortar retailers and restaurant clients who are looking to target customers when they're out of their homes and making buying decisions as well as online retailers who are looking to improve recency on the weekends when consumers are making their online purchases.

It's important that we grow in scale or theater audience data to a critical mass to be able to effectively use that audience data or to leverage our value proposition to our clients. It is that scale that will make our NCM digital capabilities increasingly attractive to advertisers and especially to national brands who buy our national and regional inventory.

And finally, our fifth pillar of the strategy is to expand our affiliate network over the next couple of years by primarily focusing on adding key affiliates and more screens in select markets which will increase our overall impression base and extend our reach to additional markets or strengthen our reach and markets we were already in.

As the largest cinema advertising network in the United States brands look to us as an industry leader to provide the scale and reach they need for effective national campaigns. There are handful of major exhibitors who are currently part of our network and whose cinema advertising contacts will be coming up for renewal that we think would be terrific additions to our network and would strengthen our nationwide network even further.

Our affiliate partnerships team also has been meeting with our current exhibitor partners and had some good discussions about how their core businesses could benefit by implementing our new and improved newbie show format with Lights Down and Platinum advertising.

While adoption across the fleet network is expected to take some time we expect to have somewhere around 10 to 15 of our affiliates running with our post show platform in 2020.

As you can tell I'm very optimistic about NCM's future. The movie slate for the rest of the year looks strong well several proven 10 poll franchises including the [indiscernible] Charlie's Angels, Frozen 2, Jumanji the Next Level and of course Star Wars, the Rise of Skywalker we have launched our new movie newbie format with Lights Down and platinum inventory our digital projects are resonating with both brands and consumers. Our consumer databases are expanding and we have continued great support from our exhibitor partners.

The 2020 up from ad market has been strong and we are seeing healthy demand from advertisers. Heading into the key holiday season as brands continue to view our unique cross platform package of in cinema advertising and digital offerings as a powerful way to reach cinemas valuable young engaged audiences both in the captive theater environment and anytime anywhere on their mobile devices.

We believe this positive marketing environment combined with the successful execution of our 5 strategic pillars for growth that are laid out positions NCM for a very bright future in 2020 and beyond.

Before I turn it over to Katie I wanted to welcome Donna Speciale also known as Donna Reisman to our board as you may have seen in our announcement this afternoon Donna's a trailblazing advertising executive with extensive experience on both the advertising agency and media network side most recently serving as the president of advertising sales at Warner Media. You can read more about Donna and her background in today's release adding Donna to the board fills our open board seat and I look forward to working together with her and bending from her fresh perspective on exhibition, media strategy marketing and cinema advertising. So welcome Donna.

I will now turn the call over to Katie to give you more details about our Q3 2019 operating performance and our 2019 guidance estimates.

Katie Scherping

Thanks Tom. I walk through the operating results that Tom highlighted in further detail, discuss our thoughts on our Q3 results as well as our full year 2019 outlook. Then we'll open the call to your questions. As always we will be providing a supplemental presentation of these results on our website for your future reference.

For the third quarter our total revenue was $110.5 million compared to $110.1 million Q3, 2018, an increase of 0.4%. This $400,000 change was driven by a $1.5 million increase in national advertising revenue offset by a decrease in regional, local and beverage revenue.

Total Q3 readjusted OBIDA was $51.7 million a decrease of $1.9 million or 3.5% versus Q3, 2018. The adjusted OBIDA margin for the quarter was 46.8% compared to 48.7% during the same period last year primarily due to a $2.7 million increase in operating expenses driven by a one-time $2 million non-cash impairment charge related to equity investments recorded in prior years in exchange for unused advertising inventory as well as the increased investment in our digital team.

Our theater access fees increased $400,000 or 2% to $20.1 million in Q3 this year compared to last year as a result of the 5.5% annual increase in digital screen fees partially offset by founding member attendance decreasing point 0.3% versus the third quarter last year.

For the third quarter 2019 national ad revenue was $82.3 million a $1.5 million or 1.9% increase versus $80.8 million in Q3 2018. The change was driven by a 0.4% increase in impression sold and higher branded content revenue partially offset by 9% decrease in CPM.

The increase in impressions sold was driven by a 1.2% increase in inventory utilization to 134.8% from 133.2% in Q3, 2018 as we delivered impressions from the prior quarter and make good balance during the quarter partially offset by a 0.8% decrease in attendance versus prior year. The decrease in CPM is primarily driven by the shift in mix of the Q3, 2019 revenue to more upfront revenue and lower scatter revenue than a year ago.

We now expect CPMs for the year to be down low single digits driven by the mix between scatter and upfront revenue for the full year. Q3 regional ad revenue decreased $400,00 from $4.5 million to $4.1 million versus the third quarter in 2018 and was primarily due to a decrease in average contract value.

The contract value decrease was driven mainly by a shift of several large clients that shifted from regional revenue and made larger national buys this year as well as a reduction in market spend of a few large regional customers compared to a year ago.

Q3 local ad revenue decreased slightly by $600,000 from $17.4 million in 2018. This decrease in local advertising revenue was due to a decrease in the volume of local contracts. This was mostly offset by the strength in our local digital sales revenue.

Overall, our Q3 local digital revenue increased 12% with over 24% related to digital deals that were integrated with local onscreen ad buys. While digital currently represents only a small part of our total ad revenue it is becoming increasingly important that clients can integrate their digital products when they buy our on-screen products.

Q3 beverage revenue decreased $100,000 from $7.4 million to $7.3 million versus Q3, 2018 driven by a decrease in founding member attendance partially offset by a slight increase in beverage CPM year-over-year.

Our Q3, 2019 advertising revenue mix was 74% national, 4% regional, 15% local and 7% beverage versus 73%, 4%, 16% and 7% respectively in Q3, 2018.

For the first nine months of 2019 total revenue decreased 2.1% or $6.4 million to $297.6 million from $304 million in the first nine months of 2018. Adjusted OIBDA decreased $5.2 million or 4% to $124 million from $129.2 million in the first nine months of 2018 and adjusted OIBDA margin decreased to 41.7% from 42.5% versus the first nine months of 2018.

Excluding the $2 million non-cash one-time Q3 investment impairment adjusted OIBDA would have only decreased 2.5% versus the same nine months in 2018. This non-cash investment impairment charge recorded this year represents the final write-off of these investments that we have recorded from several years ago.

For the first nine months of 2019 national ad revenue was $213.9 million a $500,000 or 0.2% decrease versus the first nine months of 2018.

The decrease was driven by a 4.8% decrease in CPMs, a 0.8% decrease in impression sold partially offset by an increase in branded content. The slight decrease in impression sold was the result of an increase in utilization to 116.7% from 109.1% offset by network attendance that decreased 7.2% versus the first nine months of 2018 that was driven by a record box office last year.

For the first nine months of 2019 regional ad revenue decreased by $2.4 million from $16.6 million in 2018. This decrease is driven by the shift from regional advertising to national advertising by several large clients. You may recall that we had adjusted our regional sales strategy over the last couple of years by separating our regional business from our local business to allow each team to focus on their unique selling propositions and strengths.

Going forward the regional team is refocusing its efforts on both large regional advertising clients in the top-ten DMA and the national spot TV market and our local sales team will focus on the smaller markets as well as reactivating and creating new incentives to package their theaters into multi theater deals.

In both cases, it is a cost-effective way for brands to acquire GRPs that TV can't provide. This will be especially true in 2020 when political ads dominate TV and digital ad inventory and when TV GRPs become scarce. We expect to be able to take advantage of this next year by offering brands a safe, engaging, entertaining environment free of politically negativity that provides reach and video GRPs for local and regional advertisers with no chance of preemptions unlike TV.

Our audiences also appreciate the fact that their local movie theater is a haven from the bombardment of negative political advertising in TV and the internet which may also help with audience engagement throughout the year.

For the nine months of 2019 local ad revenue decreased 3.5% or $1.7 million from $49 million to $47.3 million compared to last year. The decrease in local advertising revenue was due to a 10.4% decrease in the volume of contracts partially offset with 12% higher local digital sales revenue. As previously discussed clients are looking to integrate their cinema ad buys with our regional retargeting capabilities post the movie-going experience which provides for higher average contract values.

For the first nine months of 2019 beverage revenue decreased 7.5% or $1.8 million from $24 million to $22.2 million versus the first nine months of 2018 due to 6.7% decrease in founding member attendance partially offset by a slight contractual increase in beverage CPM.

For the third quarter we reported GAAP diluted earnings per share of $0.12 versus an earnings per diluted share of $0.14 in Q3 of 2018.

For the nine months of 2019 we reported GAAP diluted earnings per share of $0.22 compared to earnings per diluted share of $0.16 in the first nine months of 2018 as a result of deferred tax expense decreasing $10.7 million from the first nine months of 2018 to the remeasurement of our deferred tax assets in 2018 and as a result of state tax law changes.

For the first nine months of 2019 capital expenditures were $10.5 million versus $11 million spent in 2018. We are estimating there a full year 2019 capital expenditures will be in the $14 million to $15 million range or approximately 3% of revenue including $7 million to $8 million of digital investments.

In the third quarter and for the first nine months of 2019 we recorded $5.6 million and $13.7 million respectively of integration and other encumbered theater payments associated with AMC Rave theaters and AMC Carmike theaters versus $5.5 million and $13.3 million respectively in 2018.

As a reminder these integration and other encumber theater payments are added to adjusted OIBDA for debt compliance and partnership cash distribution purposes are not included in reported revenue or adjusted OIBDA as they are recorded as a reduction to net intangible assets on the balance sheet.

We expect to record approximately $20 million to $21 million of integration payments from our founding members during 2019. It should be noted the AMC rave integration payments of approximately $1.5 million will continue through next year and the AMC Carmike theater integration payments of approximately $19 million will continue through the remaining term of AMC ESA through 2037.

Now moving on to our balance sheet. Early in the fourth quarter we refinanced our $400 million 6% senior secured notes due in 2022. This refinancing extends the maturity date of those notes that were refinanced by nearly six years to April 2028 and reduces the interest rate from 6% to 5.875%.

We will pay interest on the notes semi-annually on April 15 and October 15 of each year. We may redeem all or a portion of the notes starting April 15 2023 at 103% of the principal amount with the redemption declining 1% annually each year until 2026 when the company may then redeem the note at par value.

As a result of this transaction interest savings are expected to be $500,000 annually versus the 6% note. The refinancing positions as well for the future as it diversifies our debt maturities and reduces the near term refinancing risk as the next maturity is coming due on a revolving line of credit in 2023.

Our total debt outstanding at MCMLLC at the end of Q3 2019 was $23 million lower than the end of Q3 2018. Our bank and bond term debt were $897 million versus $912 million at the end of Q3, 2018 and our revolver balance at the end of the current quarter was $6 million compared to $14 million at the end of Q3, 2018.

Our average interest rate and all debt was approximately 5.7% for both periods including our $267 million floating rate, term loan, bank debt and a revolving credit facility that had a rate of approximately 5.2%.

Excluding our bank revolver balances 70% of our total debt outstanding at the end of Q3, 2019 had a fixed interest rate.

By way of reminder under our charter we can pay down up to $15 million of our debt annually without founding member of board approval. For the nine months 2019 we retired $5 million of our 2026 senior unsecured bonds for $4.6 million. In addition to the $15 million of these same bonds, we’ve returned during 2018 for $14.2 million.

We are continuing to evaluate this discretionary reduction of our debt based on future free cash flow generation. The related debt leverage level, alternative investment opportunities, and our public company dividend policy.

Our total net leverage at NCM LLC as of the end of Q3 was approximately 4.2 times trailing fourth quarter adjusted OIBDA, which is well below our consolidated net total leverage maintenance covenant of 6.25 times.

Our consolidated net senior secured leverage ratio was 3.1 times versus a covenant of 4.5 times. Our consolidated cash and investment balances as of Q3 2019 was $63 million with $61 million of this balance at NCMI.

We currently have enough cash available to cover more than four quarters of dividends at NCMI with approximately $0.75 per share of cash on hand at the end of Q3, 2019. We announced today that the Board of Directors have authorized the Company's regular quarterly cash dividend of $0.17 for common shares of stock. The dividends will be paid on November 29, 2019 to stockholders record on November 14, 2019.

With over four quarters of cash on hand at NCMI combined with the current dividend payout ratio of approximately 85% to 90% of available cash generated over the last seven quarters, as part of our strategic planning process for 2020, our Board intends to evaluate the appropriate level of our future dividend payout ratio in order to continue to maintain an appropriate level of cash reserve at NCMI that will ensure the long-term sustainability of our dividend while paying out a substantial portion of our available cash to shareholders.

The Company intends to pay a regular quarterly dividend for the foreseeable future at the discretion of the Board of Directors consistent with the Company's intention to distribute overtime, a substantial portion of its free cash flow.

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, including opportunities to reinvest in the business and any other factors that the Board of Directors considers relevant. Our annual dividend yield is currently 8% based on today's closing share price of $8.48. As a reminder currently 100% of our dividend is tax deferred for income tax purposes.

Now turning to guidance, the third quarter ending a bit softer than expected and a lower than expected result of selling our [indiscernible] platinum inventory for November due to the timing of getting into the market with this inventory we are adjusting our full year 2019 revenue guidance to $435 million to $445 million or down 1.5%, up 1.1%, and adjusted with the guidance to $195 million to $205 million, or down 5% flat.

This guidance includes the yearend make-good balance assumption of $8 million. The ending make-good balance could fluctuate up or down a few million dollars depending on the box office performance over the last one to two weeks of our fiscal year, which ends on December 25, which includes only the opening week for the release of Star Wars. The last five weeks of the year, our largest revenue period of the year, and given the current market trends of a later breaking scatter market our revenue and adjusted OIBDA can be impacted meaningfully buy one or two last minute deal in addition to the fluctuation of our make-good balance.

For instance, as Tom mentioned, we just recently sold our first [62nd] Platinum unit for December. We will be providing initial 2020 full year guidance on our 2019 earnings call in February.

Looking at NCM LLC’s available cash calculation for 2019 starting with our updated adjusted OIBDA guidance of $195 million to $205 million, you will add the following as a bill-to-available cash, one integration payments of $20 million to $21 million, and two cash payments from the Fathom note receivable of $5.7 million that will end at the end of this year.

As a reduction to available cash, you will subtract the following cash interest expense of approximately $53 million to $54 million, annual scheduled debt principal amortization of $2.7 million plus discretionary bond repurchases of $5 million and approximately $8.5 million in fees related to our recent bond refinancing. Three capital expenditures of $14 million to $15 million, and four, non-cash stock comp for Inc employees of approximately $2 million. These are the components that will allow you to arrive at a projection for available cash at NCM LLC at the end of 2019 which is paid to the founding members circuit and NCM Inc at the end of each quarter based on their ownership at that time.

In addition to the available cash distributed to NCM Inc from NCM LLC, and consistent with prior years, we project approximately $5 million should be paid to NCMI from NCM LLC for management fees, plus $1.5 million of interest earned on NCMI cash balances reduced by the expected payout of $15 million to $16 million for payments under the tax receivable agreement to our founding members. This will allow you to calculate the net cash available to fund current annual dividend and the current annual payout ratio are approximately 90% at our guidance midpoint.

This concludes our prepared remarks and we will now open the line for questions. Darrel?

Question-and-Answer Session


Thank you. At this time, we'll be conducting a question and answer session. [Operator Instructions].

Our first question comes from the line of Eric Handler of MKM Partners. Please proceed with your question.

Eric Handler

Yes, thank you very much for the question, good evening. Tom, just could if you could talk a little bit about customer reaction now that you've had some time to speak with all these advertisers. Obviously, it was good enough for one person to buy the Platinum Spots, which is great, but I'm just saying, just thinking of, playing or trying to balance higher prices versus is, close to the air time for movies, what's been the reaction from clients there?

Tom Lesinski

The reaction to the Platinum Spots, in particular has been really positive. And the announcement about moving five minutes into the post show time period has also been really positive. It's really been matter of timing. We've only been in the marketplace for a little over four or five weeks and candidly, it was the end of the year. But we know that the 2020 interest level beyond what we've done in November and December has been really strong. So, there's a lot of enthusiasm. We've probably talked to over 100 different advertisers already. And we're confident that 2020 is going to be a big year for both post-show and for Platinum.

Eric Handler

So, you think the advertisers are fully buying into close lights down close to the air time of the movie a good value for paying a higher price or higher CPM?

Tom Lesinski

Yes. And I think what's important is that many of the advertisers have been wondering what actually took so long. And the acceptance is actually there hasn't been really pushback on the pricing front. And it's been more about excitement over the fact that the advertising inventory is closer to the actual movie. And that's been very attractive. I would ask Cliff Marks, Cliff, if you want to make a comment or two, on how you feel the program has been going, this would be a good time to do it.

Cliff Marks

Yes, I think that our advertisers are very excited. I've never seen reception to a product that we've had in the market like we have had to Platinum. The problem was we were too late to get to the market most of the money was spent by the time we got to market, but the response Eric has been excellent.

Eric Handler

That's great. Congratulations.

Cliff Marks



Our next question comes from the line of Mike Hickey of the Benchmark Company. Please proceed with your question.

Mike Hickey

Hey Tom, Katie and [indiscernible] last question, is it more difficult to sort of instructions China [technical difficulty]. You don't have your full network to pay [indiscernible] sort of adjusted programming [technical difficulty]?

Cliff Marks

Yes, yes. What was what we're selling is a network that is partially our old program lineup and partially our new. Our advertisers and agencies understand that it's going to take some time to get buying across the whole network. And we're pricing it accordingly. So, 56% of our network has the new program lineup, and we're pricing that accordingly and the remainder of the network does not have that. So, we're not pricing a premium on that. I think they're all very patient. Most advertisers understand that it's going to take exhibition some exhibitor’s time to get comfortable with it. And they respect it. It has not been difficult at all.

Mike Hickey

Okay, thank you. And then just in prior [indiscernible] you had a major Star Wars down, I think you remember demand be significant enough that sort of selling on to the inventory than actually stretching some of those five to [indiscernible] that’s Q1 this time around is that some way this time or is it less demand sort of a advertise of the Star Wars, Q2 period?

Cliff Marks

Bob I didn't know…..

Katie Scherping

I think what you're asking is, let me try to clarify because we're having a hard time hearing your mic, so you can tell me if I'm off-base with why but I heard you say is, you are asking about, does the Q4 sell-out bleed into Q1 with the demand in advertising are you talking about maker good or you talking about the fact that Star Wars is only running for the last week of the year? And people want to advertise in film of Star Wars move to Q1 as well?

Mike Hickey

That's right. Yes, usually I remember the demand [indiscernible] than high enough that sell-out sort of Star Wars weekend, some of that -- some of those five premium in Q1, well. So that's sort of demand from media buyers and these sort of in front of [indiscernible] and doing that in terms like, I'm just curious with similar demand is similar what you've seen entire quarters and think so where is so much demand.

Katie Scherping

Yes, we would expect Q1 at 2020 to benefit from Star Wars. For us, only really the first week is in our 2019 number. So, Q1 would be the most benefitting of the Star Wars ads.

Mike Hickey

Okay. The last question from me, I guess with the lights down inventory, you're also moving your local and mutual ad thoughts closer to show time. Are you seeing any positive impact from those borrows and now that you're leading to that, little pull up some show time and what that lead?

Tom Lesinski

I think it's fair to say that we've been looking, going to -- give me just say one thing and then Cliff you can also add on to it. We've certainly been highlighting the fact to our local and regional buyers that as our inventory moves nationally closer to the actual advertised show time that your local and regional advertising becomes more valuable as well.

But Cliff, why don’t you talk to that as well.

Cliff Marks

Yes. Well remember, I just started this past weekend, right. So, it's new in the market. The reception from our local clients has been excellent, I mean everyone likes the fact locally and regionally that we have the inventory closer to show time now.

But now Mike, we got to go out and we educate people about this because this's been a long time that they've known our show to be one format. So, it's going to take some time for us to go we educate a lot of local and regional client.

But unequivocally it's looked at highly positively.

Mike Hickey

Thanks guys, thanks a lot.


Our next question comes from the line of Eric Wold of B. Riley & Company. Please proceed with your question.

Eric Wold

Thank you and good afternoon. A few questions just on as far as stand dynamics around scatter and timing decisions, vis-à-vis kind of what impacted Q3 and kind of what you're seeing so far in Q4, I guess.

First of all, you noted that some of the pressure on CPMs in the quarter was due to lower scatter persons and more of a mix a shift to more kind of upfront purchases. And then you also noted that advertiser moving, increasely moving to more last minute scatter purchases close to the campaign.

I guess, kind of two questions from that. 1) When would you expect that dynamic to trough and potentially start to benefit results from more of a mix shift towards scatter. And then, 2) I guess normally you'd expect the ship is scattered to be more positive for CPMs.

But I guess they are you noted there are so many choices out there they can make this last one decision without much concern about sustain our dollars, does that indicate that our like CPMs are likely to be pressured even when that ship is scatter?

Katie Scherping

I think there are two questions there. One is a timing of when we been in the pipeline when we have scatter deals because of the nature of scatter there they're placed on very close to the campaign time.

So, that is impacting Q3 because we had a fairly robust pipeline early in the quarter that really declined overtime as we got close through the end of the quarter. And then, from a CPM standpoint, the less scattered dollars you have on the year-over-year basis is what drives the CPM as a percentage down.

So, when we start, we had about 27% decline in the CPM revenue year-over-year, so when you have that --.

Tom Lesinski

Scatter revenue.

Katie Scherping

Scatter revenue, sorry. You have a pressure on the CPM. So, the scatter dollar is typically our higher premium price CPM but when we saw the pipeline evaporating that impacted Q3 this year for us.

Eric Wold

Okay. Now I have to supplicate. I guess more is on a go-forward basis though. If advertiser increasingly having a lot more choices to make their last minute decisions on scatter, that would seem to imply that there is enough choices out there that they're not going to be frantic at the pay up to get their needs.

I mean that is that fair or can you still expect scatter to scatter pricing to continue to move higher even in that environment.

Tom Lesinski

I think we still think scatter will go higher. I think it's more of a convenience and friction issue. Literally, if you're on Facebook today, you can buy an ad an hour before it runs. And that doesn't exist in the cinema advertising business or in the television business.

We're making a lot of efforts on the operational side beginning hopefully as early as next year to be able to be much closer to the actual advertised time that we can place an add. But I think they're two different things and I think one is an operational thing and one's a pricing thing.

We don’t see those are being related. And then Cliff, if you want to opine on that as well you can.

Cliff Marks

Well yes Katie, what I would tell you is the good news is, is that got a lot more of our scatter dollars to be committed upfront. That's a good thing. We lock them in, we know it's on the books and it's ours.

Now, of course that comes in a lower CPM because it's moved upfront, what you need is enough of a pipeline to follow it up and have more scatter at this higher CPMs and that scatter is out there, we're just fighting for with more advertisers with more media companies than there ever were.

But there is a lot of upside spilled to us creating a lot of new scatter clients that just don’t exist today. It's specially with this new inventory. The choice going to attract come brands, I'd talk to many of them myself when and if may not have thought about cinema in a long time that are interested in this inventory.

That I think will create new demand for scatter, that'll be last minute and be premium.

Eric Wold

Okay. And then just final question if I may. I don’t know if anything's changed in general I guess with that kind of move too close range. How close is this spending happening to campaigns in general from your point-of-view, I know you noted that obviously some of the buyer fees will get into our before they want to but it's not possible in deed.

And so for NCM, how close is this spend happening to a campaign or some kind of screen because thinking about you sort of marketing the new pull show type of strategy in mid-September but noting that it was too late and then Q4 the dollars had been stamped.

So, I guess how far in advance is that going to cut off the base?

Cliff Marks

Well, I think you're asking two different questions. I mean, with we write business a week before, I mean we'll write a deal on a Thursday that'll start on a Monday or Tuesday I mean that's not so uncommon. We just were to big fourth quarter scatter deal like that.

With the situation with the money that we had kind of joined up for fourth quarter. When you're looking for big money for these platinum deals with big money for the pull show time deals, that a lot of that was committed early, it was committed upfront.

But there is a lot of scatter the brakes that we write sometimes we prefer or same week of and now let's see Tom's point we like to be even, we'd like to be able to do it day out of two days before we're just not there yet.

Eric Wold

Got it, and that's helpful. Thanks, guys.

Cliff Marks



[Operator Instructions] Our next question comes from the line of Jim Goss of Barrington Research. Please proceed with your question.

Jim Goss

Okay. A couple of first in terms of the approach the selling the platinum spot, are you looking at generally a single advertiser to block of films for say a consumer product with broader appeal across demographics.

Or are you instead looking to say multiple targeted ads that might fit whatever genre or ratings or whatever might differentiate the movies.

Cliff Marks

One of the things that's flexible about our network visibility to customize it by, whether it's demographically or by rating. So, we're really looking for big brands with big budgets that appreciate cinema and they want their kind of imagery and brand on a big screen and are willing to make a commitment both financially and with a piece of creative.

So, I think what you'll see it's a real early to tell since we're really just coming out with it but I think you'll see a number of advertisers coming in the platform on a regular basis.

Jim Goss

Okay. So, you might do sort of a mix of those two approaches, is that what you're basically saying? If somebody will buy everything, obviously your own, okay.

And I think you mentioned you were using some technologies for identifying movie covers entering the theatres and following out with relevant ads, and I'm wondering if you're thinking about or experiencing likely to some push back as customers noticed this connection?

Tom Lesinski

We have not done any push back on, we've done a half a dozen sort of programs like this using location based resources and candidly most consumers who are seeing ads on the cell phones or on the internet are often being attributed from another ad or from another advertiser.

So, it's pretty common practice in the advertising business to attribute back and we haven’t had any negative response.

Cliff Marks

Well and very importantly we follow all the rules related to privacy, so if you walk into our theater we don't know your name, we don't know who you are all we can do is identify your phone and know that you were in that theater. So everything we do is within the standard guidelines of the digital advertising medium.

Jim Goss

All right, thank you much.

Cliff Marks



Our final question comes from the line of Jason [indiscernible] of Goldman Sachs. Please proceed with your question.

Unidentified Analyst

Great. Thank you for taking my questions. So in terms of the shorter lead cycle for advertisements what sort of technology or other investments you think envision making to make the buying experience a bit more seamless for advertisers? Any magnitude of the investment you think you can share with us?

Tom Lesinski

Well, we have a major initiative going on in our company that will really streamline the advertising process from the beginning to end which will allow us to be nearly as dynamic as a digital advertiser and we've made a commitment in this process starting almost two years ago really in the planning phases we haven't actually commented on the size of that investment but I think we can get to that probably next year when we actually get to our full year forecasts and guidance for 2020 but I can issue it's a major initiative by our company. It is significant opportunity and investment for our company as well.

Katie Scherping

And Jason just as a note as we continue to migrate our technology systems and improve those systems our focus is on cloud-based applications. So what you see with a cloud-based application is significantly less capital investment than what we've traditionally had with our homegrown internally developed system and you'll see an increase in potentially an increase in OpEx and a decrease in CapEx. So you see a benefit to the cash flow of the business without having to make those large initial investments because it's a software in the cloud application. So that's as we move forward in our technology platform that's the direction we're heading.

Unidentified Analyst

Okay. Got it. That's helpful. And then in terms of the guidance reduction for the years and imply fourth quarter guidance [indiscernible] your third quarter results how much of your sort of a guidance that take down is related to just being with a more conservative with a scattered business versus just so much of the business just coming at the very last week of the year such as leaving some room for conservatism like what are you attributing to them in terms of adjustments to your assumptions there?

Tom Lesinski

So let me say this just about the fourth quarter so we feel confident in our revised guidance and we've guided conservatively for the remainder of the year given how the backend loaded film schedule looks and the potential for significant make goods depending on it. So as you know December is one of the strongest months of the year. There is obviously some really big movies happening during that time including Star Wars. So but we feel that our guidance is conservative and Katie you can add to that if you'd like.

Katie Scherping

Yes. I mean I think there are definitely some moving parts to it at the end of the year which may drive that $8 billion make good either positive from that or negatively from that. So it just depends on how Star Wars opens up against the projections that everybody is estimating and then we're the full five weeks the last five weeks of the year really where all the money is for us in the quarter. So we want to be somewhat conservative given what we saw in Q3 with a robust pipeline that really tailed off towards the end of the quarter. So we're being cautious about that I think is how I would put it.

Unidentified Analyst

Thanks for your thoughts.

Katie Scherping

Okay. Thanks Jason.

Tom Lesinski

Thanks for the questions. Go ahead.


Sorry, I was going to say we have reached the end of the question-and-answer session and I'll turn the call back over to Tom Lesinski.

Tom Lesinski

Okay. Thank you for your questions. I'm very proud to be leading NCM and its talented hard-working management team and staff into the future. Although third quarter was not as strong as we had expected we still grew our top line and to put a strategic growth plan in place that's designed to create shareholder value in many ways.

Number one, increasing the quality and value of our media inventory. Number two, upgrading our sales planning proposal and inventory tracking systems to make it easier and faster for advertisers to buy cinema and to continuing, three, to invest in digital entertainment products to improve consumer engagement and create new digital ad inventory and data. Four, building a data-driven business to be able to meet the needs of today's modern video advertising marketplace and monetizing our digital products and five, expanding our affiliate network by primarily focusing on adding key affiliates and more screens in select markets which will increase our overall impression space and strengthen our network reach.

The strategic plan will allow us to return to our original focus of providing investors with a unique investment opportunity that delivers a combination of high current dividends and stock price growth potential. I look forward to working closely with our NCM team to continue to drive our strategic vision and leverage our unique position in the medium marketplace as the leading company, uniting brands with the power of movies and engaging movie fans anytime and everywhere and accelerating NCM's growth and increasing the value of our company for our stockholders, employees, exhibition partners and advertising clients alike.

Thank you for listening to our call and we'll see you at the movies.


This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful evening.

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