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National CineMedia, Inc. (NCMI)

Q1 2015 Earnings Call· Mon, May 11, 2015

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Transcript

Operator

Operator

Greetings, ladies and gentlemen, and welcome to the National CineMedia First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Mr. David Oddo. Thank you, sir. You may begin.

David J. Oddo - SVP Finance, Co-Interim CFO and Principal Financial Officer

Management

Good afternoon. I'd like to remind our listeners that this conference call contains forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933, as amended, and Section 21-E of the Securities Exchange Act of 1934, as amended. All statements other than the 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-basis 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 www.ncm.com. Now, I'll turn the call over to Kurt Hall, CEO of National CineMedia. Kurt C. Hall - Chairman, President & Chief Executive Officer: Thanks, David. Good afternoon, everyone. Welcome and thanks for joining us for our 2015 Q1 earnings conference call. During this call, I'll provide you with a brief overview of our Q1 actual performance and color concerning market trends, progress against our business plan and our future guidance. David will then provide a more detailed discussion about our Q1 results and provide some more details regarding our guidance for Q2 and full year 2015. And then as always, we'll open the line for questions. After solid growth in Q4 2014, the momentum continued into 2015 with record Q1 non-beverage advertising revenue. Total Q1 revenue growth of 10% versus Q1 2014 was driven by a 19% increase in national advertising revenue and a 2%…

David J. Oddo - SVP Finance, Co-Interim CFO and Principal Financial Officer

Management

Thanks, Kurt. For the first quarter, our total revenue increased 9.5% versus Q1 2014 driven by a 19.2% increase in national advertising revenue excluding beverage and a 1.7% increase in local advertising revenue partially offset by 19.1% or $1.8 million decrease in beverage revenue. Total Q1 adjusted OIBDA increased 22.6% and adjusted OIBDA margin increased to 36% from 32.2%, reflecting the increase in high margin national advertising revenue that was partially offset by the decrease in 100% margin beverage revenue. We also recorded $300,000 of AMC Rave and Cinemark Rave integration payments for the first quarter versus $200,000 in Q1 2014. You should note that these integration payments are added to adjusted OIBDA for debt compliance purposes but are not included on our reported revenue and adjusted OIBDA as they are recorded as a reduction to net intangible assets on our balance sheet. We continue to expect to record approximately $2.5 million of these integration payments from the founding members during 2015. Our Q1, 2015 advertising revenue mix shifted due to the higher national growth and was 66% national, 24% local and 10% beverage versus Q1 2014 that was 61%, 26% and 13% respectively. The Q1 national ad revenue excluding beverage that increased 19.2% versus Q1 2014 was driven by a 38.2% increase in impressions delivered partially offset by a decrease in CPMs of 11.1% versus Q1 2014. The increase in impressions delivered was driven by an increase in inventory utilization to 99.9% from 72.6% in Q1 2014 due to an overall expansion of our client base related in part to the success of our strategy to compete in the national television upfront marketplace since 2012. This increase in inventory utilization was partially offset by a 3.1% decrease in our network attendance that was impacted by our fiscal calendar whereby…

Operator

Operator

Thank you. Our first question comes from the line of Townsend Buckles with JPMorgan. Please proceed with your question.

Townsend Buckles - JPMorgan Securities LLC

Analyst · JPMorgan. Please proceed with your question

Thanks. Kurt, it sounds like the business is tracking very well. Can you talk about how you're seeing scatter pacing? Has it been a pretty steady progression of strength end of the year or any variability or lumpiness in demand as you look to book the rest of the summer box office season? Kurt C. Hall - Chairman, President & Chief Executive Officer: Well, the one trend that we continue to see and we mentioned this I think on previous calls is that scatter seems to be breaking quite a bit later than it did historically. And I can tell you that the guidance you've seen us gave in Q2 a lot of that money came in in the last three to four weeks and so we're clearly seeing this continuing trend of late-breaking scatter. I don't know if it's being driven by the greater influence of the digital stuff, the online and mobile stuff as that can generally be booked later, but clearly something is going on there.

Townsend Buckles - JPMorgan Securities LLC

Analyst · JPMorgan. Please proceed with your question

And can you give any color on how you're seeing Screenvision compete in the marketplace since you parted ways? And with the upfronts underway, any difference in how they're positioning themselves? Things obviously got very competitive a year or two ago, but your revenue and CPM guidance is clearly quite strong here. So do you feel like cinema overall is doing quite well or do you feel like there's some market share shifts going on? Kurt C. Hall - Chairman, President & Chief Executive Officer: I think clearly there were some market share shifting going on, but I think there is very strong demand for us right now as you can see from our numbers. So I'd like to think that buyers are just looking at cinema a little more seriously than they have in the past.

Townsend Buckles - JPMorgan Securities LLC

Analyst · JPMorgan. Please proceed with your question

All right, great. Thank you. Kurt C. Hall - Chairman, President & Chief Executive Officer: Yeah. Welcome back.

Operator

Operator

Thank you. Our next question comes from the line of Barton Crockett with FBR Capital Markets. Please proceed with your question. Bart E. Crockett - FBR Capital Markets & Co.: Okay, great. I wanted to probe a little bit more on the drivers of the revenue growth, which is tremendous this year, and really thinking about the sustainability of this as we get past this year into next year. If you were to rank order what's really kind of the most important factors, how would you rank excitement about the movie slate among advertisers versus wanting to get behind the winter, what seems like the winter for a while in the Screenvision NCM merger saga, versus just a sea change in sentiment towards theater advertising? Kurt C. Hall - Chairman, President & Chief Executive Officer: Well, I think – let me just go about it a different way because the answer to your first choice, the film schedule, I think it's clearly a more important factor for our local business than our national. I don't think the national marketers generally schedule their product releases or other marketing plans around film schedules per se. In the local business, clearly the local advertisers pay a lot more attention to the film mix because people are generally in their seats earlier when their blockbuster is playing and because the local and regional ads play further from the advertised show time, that is a good thing for those advertisers who generally pay us on a screen per week basis. So it's a little different answer depending on what medium you are talking about. I obviously don't know to what extent any of the Screenvision merger potential affected people's buying behavior, people don't generally tell you those type of things. So I'll leave that for…

Operator

Operator

Thank you. Our next question comes from the line of James Marsh with Piper Jaffray. Please proceed with your question. James M. Marsh - Piper Jaffray & Co (Broker): Great, thanks very much. Just two quick questions. The first, I was just hoping if you could give us an update on what's going on with beverage these days and just what the outlook is for that category? And then secondly, I think Kurt you mentioned liquor advertising, I don't recall that really mentioned before. I was just wondering what kind of restrictions you're outstanding on the type of advertising? I know in the past television, it was a little bit problematic, but maybe you could just update us on what, if any, restrictions are available there? Kurt C. Hall - Chairman, President & Chief Executive Officer: Sure. We generally try to follow what is followed on TV. There are no actual laws, but there is a rule of thumb that networks try to follow where at least 70% or more of the audience will be of drinking age of 21 or greater. So we try to follow some of the same rules and it generally means that we're going to only play liquor ads against R-rated films. We've gotten a little more specific, we've taken horror and other R-rated films that generally attract a younger sort of late teen, early 20s audience. We usually take those out of the mix because we know they have a very high SKU of people that are not of drinking age. And on occasion, we will add in PG-13 or PG films that are of a much more higher age target. But again, the goal is to try to comply with the 70% or more guidelines that the television marketplace uses. And first question was on beverage, as you know, the beverage revenue is completely contractual with our founding members. The decrease this year that you're seeing I think we said was coming in our last call was almost 100% based on the fact that our CPMs or our best inventory, primarily segment one inventory, went down last year. I think the number was around 14-or-so percent. So we're hopeful that this year with the stabilization of our CPMs, albeit at a lower level, that we see that revenue also stabilize. James M. Marsh - Piper Jaffray & Co (Broker): Okay. All right, helpful. Thank you, guys. Kurt C. Hall - Chairman, President & Chief Executive Officer: You're welcome.

Operator

Operator

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

Eric O. Handler - MKM Partners LLC

Analyst · Eric Handler with MKM Partners. Please proceed with your question

Yes. Thanks for taking my question. Kurt, wondering if you could talk a little bit about, with this year's upfront, last year you had a very nice deal $50 million deal with Omnicom. So going directly with the buying agencies, is that going to be a bigger focus for this year? And how do you sort of balance going directly with the advertiser versus the buying groups and how does that play out in terms of the upfront? And then secondly, I wondered if you're seeing as the upfront sort of fully heat up right now, are you seeing any positives being taken by advertisers as they try to figure out what CPMs are going to be asked for from the broadcast and cable networks. Kurt C. Hall - Chairman, President & Chief Executive Officer: Yeah. I'll answer the second one, it's easy, because the activity we've seen over the last four weeks, as I mentioned, has been pretty robust. And so, we clearly haven't seen, as it relates to us, any impact of any positioning that maybe going on in the TV marketplace, the upfront marketplace. So I can't really tell, Eric, if there is any impact on what's going on there. All the evidence that we seem to see right now is that there's a pretty favorable deal of our network. What was the first question?

Eric O. Handler - MKM Partners LLC

Analyst · Eric Handler with MKM Partners. Please proceed with your question

Talking about a strategy of going – Omnicom was a big $50 million deal? Kurt C. Hall - Chairman, President & Chief Executive Officer: Look, at the end of the day, it's kind of up to the client on how they want to handle that. We obviously are approaching both agencies and individual clients during the upfront process. If clients and agencies agree that that client is going to be part of a bigger deal that the agency may do with us then that's obviously what will happen. So we're going down parallel paths during this upfront process and dealing with both clients and agencies. And as you pointed out, we were able to get one agency onboard last year. We hope that we'll be able to get on more onboard this year.

Eric O. Handler - MKM Partners LLC

Analyst · Eric Handler with MKM Partners. Please proceed with your question

Great. Thank you. And just a quick follow-up. What percentage does that mean as you think about agencies versus companies, your agency deal is just $50 million and that's it, so whatever growth you get from that is what your agency revenue is where everything else is directly to client? Kurt C. Hall - Chairman, President & Chief Executive Officer: Well, that was true for last year, obviously. I don't know how that's going to play out this year. But yeah, the only agency deal that we had last year would be Omnicom one.

Eric O. Handler - MKM Partners LLC

Analyst · Eric Handler with MKM Partners. Please proceed with your question

Great. Thanks a lot, Kurt. Kurt C. Hall - Chairman, President & Chief Executive Officer: Welcome.

Operator

Operator

Thank you. Our next question comes from the line of James Dix with Wedbush. Please proceed with your question.

James G. Dix - Wedbush Securities, Inc.

Analyst · James Dix with Wedbush. Please proceed with your question

Good afternoon, guys. I guess, two questions. Just as the upfront is becoming a bigger part of your overall business, if you could just remind us what are your basic upfront cancellation polices and what have you seen in terms of any cancellation activity as you move forward through the year. I think it's just helpful for us to understand the degree of visibility you think that that those upfront commitments are giving you, especially as they scale? And then, my second one was just on any particular color you can give on the improvement in the scatter market in the second quarter, do you think there is – anything related to verticals or anything in terms of shifts? I'm just curious about that. Thanks. Kurt C. Hall - Chairman, President & Chief Executive Officer: As far as the upfront stuff – excuse me, the Q2 stuff, we talked about in our comments the various client categories that were experiencing some strength in. And so, I think I'll just leave it at that and I think you can either look at your notes or we can go over that later with you which categories that was. So we're not seeing any specific category be stronger than the other. I think the only trend we're seeing is that there is a lot more openness across categories that we've never been able to talk to before in a rationale way than there has been in the past. So again, just I think given what's going on in TV and some of the other mediums that we compete against, I think we're just seeing a much more open dialogue than we have in the past. We're also benefiting I think as we go into the upfronts from the fact that our scatter pricing is meaningfully higher than our Q2 upfront and our full upfront pricing was. So that's obviously a good fact as you go into the upfront. The upfront cancellation policy, what we try to do is stick fairly close to the way the TV guys think about it. Earlier commitments are more firm than later commitments. I can't give you a statistic because it's all over the board depending on the client. So I'd rather not just generalize because, again, it does fluctuate by client, but we generally try to follow some of the rules that are implicit in the TV marketplace.

James G. Dix - Wedbush Securities, Inc.

Analyst · James Dix with Wedbush. Please proceed with your question

But just so I understand, has your experience been the most that those upfront commitments have ended up turning into revenue even as that scale to become a bigger part of business? Kurt C. Hall - Chairman, President & Chief Executive Officer: Yeah. So far I'm not aware of any full on cancellations. We've had some stuff move around from quarter to quarter, but we have not had any cancellations up to this point.

James G. Dix - Wedbush Securities, Inc.

Analyst · James Dix with Wedbush. Please proceed with your question

Okay, great. Thank you. Kurt C. Hall - Chairman, President & Chief Executive Officer: Yeah. @Welcome.

Operator

Operator

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

Michael Hickey - The Benchmark Co. LLC

Analyst · Mike Hickey with The Benchmark Company. Please proceed with your question

Hey Kurt and David, hopefully you guys are good. Thanks for taking my questions. Just curious on your first half performance potential here. Obviously, Q1 is booked and Q2 looks really promising given your guidance. Do you feel, I guess, some of that presumed strength may be in part attributable to what appears to be meaningful disruption in Screenvision's business from your attempted acquisition? And then I have a follow-up. Kurt C. Hall - Chairman, President & Chief Executive Officer: So I didn't actually understand what your question was there, Mike. Could you maybe be a little bit more correct (38:50)?

Michael Hickey - The Benchmark Co. LLC

Analyst · Mike Hickey with The Benchmark Company. Please proceed with your question

Yeah, I understand that. Your first half performance seem to look very strong. I'm just curious if some of that strength that we've seen in Q1 and expect to see in Q2 is in part attributable to disruption in Screenvision's business from the attempted acquisition? Kurt C. Hall - Chairman, President & Chief Executive Officer: I don't know really know about that. It's hard to say what the disruption factor is. They were still out there selling hard and so I can't really comment on that, Mike. It would be total speculation at this point.

Michael Hickey - The Benchmark Co. LLC

Analyst · Mike Hickey with The Benchmark Company. Please proceed with your question

All right. Fair enough. And then I'm curious on the upfront sale, obviously, you had a lot of success and it's been a gradual win for you and your team over the years. But given the success in the upfront, do you think some of this will challenge your scatter selling? The idea I guess is there might be some shift in scatter money to the upfront. And I think you sort of surfaced that concern before and it is a concern perhaps that's why your fiscal year guidance seems somewhat conservative given the strength of your current business? Kurt C. Hall - Chairman, President & Chief Executive Officer: Yeah, look, there is no question that a lot of our clients that historically booked in the scatter market booked upfront. And we've taken that into consideration and giving some of our guidance. I think clearly what you would view as our conservatism is just our point of view that we've got half a year left. This is pretty early in the year to start move in your guidance and we did give a little optimism within our current guidance range up to the upper end. So, I think at this point that's what we're comfortable with. I just think at this point it's best this early in the year for us to approach it this way.

Michael Hickey - The Benchmark Co. LLC

Analyst · Mike Hickey with The Benchmark Company. Please proceed with your question

All right. Thanks, Kurt. Best of luck on the upfront guys. Kurt C. Hall - Chairman, President & Chief Executive Officer: Yeah. Thank you very much.

Operator

Operator

Thank you. Our next question comes from the line of Jim Goss with Barrington Research. Please proceed with your question.

James Charles Goss - Barrington Research Associates, Inc.

Analyst · Jim Goss with Barrington Research. Please proceed with your question

All right. Thanks. I was wondering, did you say what the sellout ratio was last year and what you are hoping for incrementally this year in terms of upfront? Kurt C. Hall - Chairman, President & Chief Executive Officer: Yeah, just, we're looking back through to get the exact language, I want to make sure.

David J. Oddo - SVP Finance, Co-Interim CFO and Principal Financial Officer

Management

The upfront was low 70% (41:20). Kurt C. Hall - Chairman, President & Chief Executive Officer: Yeah. The upfront last year I think was – we went into the year just over 70% and now we're up, I think we had said 84% or something like that – 85% of the year booked right now. So, obviously, we've made some progress since we talked before. I think Jim anywhere in that 70% to 80% range as you go into a year, is a good place to be for us. The cable networks are sort of in the mid 70s%, historically the broadcast networks have been over 80%. I think what we're seeing this year with our scatter pricing being so much higher than our upfront pricing that obviously may give us a hope to maybe be at the lower end of that range this year, and that may be a good thing for us because there may be some expansion revenue opportunities in the scatter market. Having said all that, there is no question that the upfront strategy for us has been a great success because it's allowed us to create a base of business that allows us to package, as I said before, higher demand flights with lower demand flights. And so, being able to sit down with a client at the beginning of the year and talk about the whole year is very beneficial for us, because it cuts down on our volatility, it allows us to look at what the marketing plans are of the client and match those with our available inventory and so, that discussion that is going on sort of as we speak and will go on throughout the summer, is a very good thing for our business. And I think it actually allows clients to be able to use our network more effectively than they have in the past.

James Charles Goss - Barrington Research Associates, Inc.

Analyst · Jim Goss with Barrington Research. Please proceed with your question

Okay. And I think it was very encouraging that you had basically 100% utilization in the first quarter. You are close to that in the second quarter. I assume you will be at least somewhat more conservative in pricing until you achieve that in the full year and then you'll feel you have the pricing power to go forward? Kurt C. Hall - Chairman, President & Chief Executive Officer: Yeah. Jim, just to be clear and David mentioned it and I alluded to it, the 100% that we quoted in the first quarter is really about 73% based on all the available inventory we have. As you know, those percentages that we put out there, the 100% for instance in the first quarter, are based on a denominator in that calculation of eleven 30-second units. So, as David (43:59), we have more than fourteen 30-second units now and so, our total sellout would be, the way we talk about it would be 137%. So, we still have some work to do in the first quarter to sellout our inventory. Those numbers obviously will be higher in second and third and fourth quarter as they usually are.

James Charles Goss - Barrington Research Associates, Inc.

Analyst · Jim Goss with Barrington Research. Please proceed with your question

And do those figures include the movement from 2 minutes to 2.5 minutes in the (44:31)? Kurt C. Hall - Chairman, President & Chief Executive Officer: Yeah. As you may recall, we always used to say that we're – about 127% would be full sellout which is...

James Charles Goss - Barrington Research Associates, Inc.

Analyst · Jim Goss with Barrington Research. Please proceed with your question

Right. Kurt C. Hall - Chairman, President & Chief Executive Officer: ...basically just mathematically fourteen over eleven. Now the number if you do the calculation is about 136%. So, we only got back that 30-second unit in about half or so of our overall network. So, when you do all of the math, it comes out to about 136%.

James Charles Goss - Barrington Research Associates, Inc.

Analyst · Jim Goss with Barrington Research. Please proceed with your question

Okay. Last question. Are you finding, you may have talked a little about this earlier, but are advertisers buying specific titles rather than sort of weeks or whatever happens to come on the screen during those periods? Kurt C. Hall - Chairman, President & Chief Executive Officer: Yeah. We won't let them buy specific titles. That's just not a good way to sell our inventory because you end up with too many tales that you can't sell. So, historically, we've always sold by film rating. So, there's four basic rating groups G, PG, PG-13 and R. What we're moving to now is more sort of film genre, which includes a fairly broad group of films that have a specific target whether it'd be younger females, older females, younger males, older males and so on. And we're also doing something I alluded to called dynamic pricing which we're starting to price our inventory not on a flight-by-flight basis based on demand, but more on a week-by-week basis. We've put in place some new technology and process that's allowing us to look much more carefully at the demand of the heat, if you will, on inventory in any given week. So, that allowed us to go out with proposals that are much more reflective of the actual demand for a given week. And obviously that does have some connection to individual films that may open in that week, but we won't allow them to buy just the impressions associated with a specific film.

James Charles Goss - Barrington Research Associates, Inc.

Analyst · Jim Goss with Barrington Research. Please proceed with your question

All right. Thanks very much. Kurt C. Hall - Chairman, President & Chief Executive Officer: You're welcome. Thank you.

Operator

Operator

Thank you. Ladies and gentlemen, at this time I'd like to turn the call back to Mr. Kurt Hall for closing comments. Kurt C. Hall - Chairman, President & Chief Executive Officer: Thanks, everyone and thanks for your patience. And I'd also like to thank all of our teams here at NCM. They've done a tremendous job of staying focused over the last year and I think the results of the fourth quarter, first quarter and our guidance for the second quarter I think reflect a great job with an awful lot of distractions out there. So I'm very proud of them and so I'd like to thank them as well. So, please let us know if you have any other follow-up from our comments today and we'll be talking to you on our next call. Thank you.