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Edited Transcript of NCMI earnings conference call or presentation 21-Feb-19 10:00pm GMT

Q4 2018 National CineMedia Inc Earnings Call

Centennial Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of National CineMedia Inc earnings conference call or presentation Thursday, February 21, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Clifford E. Marks

National CineMedia, Inc. - President & Interim CEO

* Katherine L. Scherping

National CineMedia, Inc. - CFO

* Thomas F. Lesinski

National CineMedia, Inc. - Chairman

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Conference Call Participants

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* Eric Owen Handler

MKM Partners LLC, Research Division - MD, Sector Head & Senior Analyst

* James Charles Goss

Barrington Research Associates, Inc., Research Division - MD

* Michael Joseph Hickey

The Benchmark Company, LLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to National CineMedia, Inc. full year and fourth quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Miss Katie Scherping, Chief Financial Officer. Thank you. You may begin.

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Katherine L. Scherping, National CineMedia, Inc. - CFO [2]

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Thanks, Michelle. Good afternoon. I am joined here in Denver by Cliff Marks, our President and Interim CEO; and Tom Lesinski, our Chairman of the Board. 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 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 with that, I'll turn the call over to Tom.

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Thomas F. Lesinski, National CineMedia, Inc. - Chairman [3]

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Thank you. Good afternoon and welcome, everyone. Before I turn the call over to Cliff Marks to discuss our results, I would like to take a few minutes to welcome, or should I say welcome back our newest board member, Kurt Hall. As announced a few weeks ago, Kurt was unanimously approved by our Board of Directors. Those of you who have been following NCM for years know that Kurt has served as NCM's President, Chief Executive Officer, and Chairman of the Board until January of 2016 when he retired to spend more time with his family and pursue his many outdoor interests. He continued to work with NCM as a consultant from January, 2016 until January, 2018. After many years as a theater company executive, Kurt helped found NCM and was instrumental in building it from the ground up, taking NCM from a media startup to a mature public company. He brings an unmatched level of experience, insight, historical perspective, and industry relationships to the table and I am pleased that he is back on the NCM Board.

We are continuing our CEO Search to identify a visionary leader who can capitalize on the strengths of our company and our unique CineMedia advertising medium and innovate around NCM's core business to ensure that we are best positioned for sustainable, profitable growth and value creation for our advertising partners and shareholders alike. We are actively interviewing candidates for this role and we believe it's important to take the necessary time to find the right fit for NCM.

While we look for our next CEO, Cliff has been doing a great job of leading our company as Interim CEO and continuing to spearhead our media sales strategy. Cliff is also intimately involved with our CEO search and will play an important role to ensure a seamless leadership transition when the new CEO is hired. With that, I'll turn it over to Cliff for a few remarks on the business before Katie reviews the financial results for the fourth quarter and full year 2018.

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Clifford E. Marks, National CineMedia, Inc. - President & Interim CEO [4]

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Thanks, Tom. And thanks to everyone for joining us on today's call. I will be reviewing the company's fourth quarter and full year 2018 operating results and highlights. Katie will then provide a more detailed discussion of our financial performance and our 2019 revenue and adjusted OIBDA guidance. As always, we will then provide time for questions you may have.

Our year began very strong with solid Q1 and Q2, but Q3 saw several clients shifting their spending to Q4. While we couldn't totally capitalize on this high Q4 demand due to an unusual film slate rating mix, it has set us up strong for 2019.

I'll now walk you through fourth quarter of 2018. Despite the film mix challenges, demand was strong and total revenue for the fourth quarter only decreased 2.3% from last year's fourth quarter, which happened to be the second highest fourth quarter in our history. Our national sales revenue decrease of 3.7% versus fourth quarter 2017, excluding beverage, was related to a higher percentage of the box office being generated by G and PG films like Mary Poppins, rather than the PG13 and R films like last year's Star Wars which were in higher demand by our advertising clients.

So while our national sales team did great and we saw strong demand for our inventory, especially in PG13 and R categories, we just didn't have enough impressions to satisfy demand in those ratings. Also, while attendance was up 3.7%, overall fourth quarter a sharp a decrease in attendance in the last 2 weeks of December compounded the unfavorable ratings mix and adjusted in a record $8 million made good, without which we would have been within the higher end of our revenue guidance. Due to the high incremental margins of our national business, this shift of revenue to Q1 of 2019 contributed to an adjusted fourth quarter OIBDA decrease of 7.7%.

The good news is that this is only a timing issue as those make goods will benefit our Q1 2019 national revenue which is currently trending above this year same time last year which was a record Q1 2018 in advertising revenue. As a result of all the changes we've been making to right-size our local and regional sales structure, our teams began to turn things around in the fourth quarter as revenue increased just under 1% versus fourth quarter 2017.

Let's talk about full year 2018. 2018 reflected a year of progress on several fronts. Our national advertising business rebounded nicely over 2017 as we made significant strides in growing our national ad categories including telecom, digital entertainment and online media, military and pharmaceutical. We also continued to strengthen our ability to provide marketers with digital extensions of our core business as we made our Noovie digital ecosystem much more robust with the rollout of our augmented reality app, Noovie Arcade, and the alpha release of our Noovie.com, which I'll get into more in a minute.

Total revenue for full year 2018 increased by 3.6%, but an increase in theater access fees related to higher industry attendance and some one-time operating and administrative costs, resulted in only a small increase in adjusted OIBDA. Katie will discuss these higher costs in more detail later in the call. Our national advertising sales team had a very strong year overall as national revenue grew by 5.3% versus 2017, excluding beverage, as the team expanded several key client categories and leveraged a strong scatter market that continues to break closer and closer to campaign airdates.

The $15.7 million increase in national advertising revenue was due primarily to a 2.2% increase in national advertising CPMs, excluding beverage, and a 3% increase in impressions sold. The increase in impressions sold was primarily related to a 7.5% increase in network attendance, partially offset by a decrease in national inventory utilization from 118.5% in 2017 to 113.5% in 2018. The increase in national advertising CPMs was due primarily to an increase in scatter market demand and the completion of more contracts closer to the advertisement airdates, which are typically sold at higher CPMs.

We welcomed over 42 national brands to our Noovie preshow in 2018 from top categories including financial products and services, hotels and resorts, insurance, pharmaceutical, telecom, software and notably, digital entertainment and online media which was up over 50% in the last -- 50% in the last year and becoming an increasingly important category for us as these brands are replacing more traditional entertainment media advertisers on the big screen. We're also continuing to aggressively participate in the 2018/2019 upfront marketplace. And it's worth noting that we are already pacing 13% ahead of our 2017/2018 upfront. This strong upward pacing is due to a few of our larger 2018 scatter market customers placing significant 2019 dollars upfront as they've come to recognize the value of locking up key cinema inventory in advance to align with their marketing priorities.

While our 2018 local and regional sales were down 1.9% versus 2017, as mentioned we finished the year up, as the changes we made to our sales team structure and selling strategies began to take hold. We had an 8.7% decrease in total contract volume partially offset by a 6.2% increase in average contract value. The decrease in total contract volume was primarily related to the decrease in the number of contracts over $100,000 within the automobile and airline categories compared to previous years. We have realigned our regional sales team to continue to build on the success of our national spot TV strategy as spot buyers are increasingly turning to cinema in the MediaOcean and FreeWorld systems for media planning and buying to make up for their lost GRPs due to declining TV ratings.

Also, with a leaner and more focused local sales team now in place and some growth already evident in first quarter, we have turned the corner and are optimistic about both our local and regional business as we head into 2019.

The expansion of our Noovie digital ecosystem to support our core onscreen business continued to be a bright spot throughout 2018, as nearly 43% of our national and 30% of our local and regional ad buys included a digital component. This is nearly 12% and 8% increase in our national and regional local integrated ad buys respectively over 2017 and is proof that our digital products are helping to drive our core high margin onscreen ad business. These integrated packages continue to be increasingly popular with advertisers and have helped us land several major onscreen buys from advertisers who are looking to engage more directly with our young, hard to reach movie audience throughout their online, mobile and in-theater moviegoing experience.

As mentioned earlier, in the past we launched Noovie ARcade, the revolutionary new companion app for Noovie Preshow that lets audiences play big screen, interactive, augmented reality games on their mobile phones. The biggest brand in the entertainment industry took advantage of this opportunity as moviegoers nationwide played along with Walt Disney Studios' Wreck-It Ralph in a new Wreck-It Ralph Breaks the Internet game, our first studio collaboration and an industry-first in theater AR activation. Noovie ARcade now has been downloaded nearly 2 million times and that figure will continue to grow as we introduce new AR games and experiences in 2019.

We also began a soft launch rollout of Noovie.com, which will serve as our official Noovie search and discovery platform for movies and games with more unique and interesting movie content being added every day. And we're currently working on the new Noovie Trivia game that will be rolled out the first half of 2019. Trivia remains one of the top gaming requests from our young and engaged movie audiences according to our research. By having a suite of Noovie digital owned and operated properties, it allows us to capture unique and valuable first party movie audience data that will also increase the operating margins of our digital revenue.

Speaking of audiences, we reached an even larger cinema audience in 2018, growing our national theater network footprint over 21,100 screens and 750 million attendees as of the end of the year 2018. We welcomed several new affiliates such as Pecan Pie Productions and its independent theaters, Real Luck Cinemas, Foundation Stone Theaters and West Mall Theaters to America's movie network. As you may have seen yesterday, we also just renewed our long-term affiliate partnership agreement for Movie Tavern Theaters and that has recently been acquired by Marcus Theaters. I'm very happy to be working alongside Rolando and his team to continue to bring the Noovie Preshow to these terrific Movie Tavern by Marcus Dine-in theaters.

We significantly strengthened our leadership team in 2018 with the addition of Senior Vice President and General Counsel Sarah K. Hilty, Chief Digital Officer Rick Butler, and Vice President of Digital Ad Sales, Jerry Canning. 2018 was also significant for NCM on the financial side as we prepaid some of our debt for the first time since we became a public company. We intend to continue to opportunistically pay down debt going forward while maintaining financial flexibility and delivering a sustainable dividend for NCM stockholders. We also currently have enough net cash available to cover 5 quarters of dividends at NCMI with $0.90 per share of cash on hand at the end of 2018. $0.90 per share of cash on hand at the end of 2018. Katie will go more into that detail shortly.

While there were some changes to our leadership and ownership in 2018, we continued to bring value to our clients and shareholders. There was perhaps no stronger vote of confidence in the future of our business than demonstrated by Cinema World and Cinemark's increased investments in NCM this year. We were pleased to deepen the collaboration with 2 of our founding members on our future business plans and strategies for continued financial growth while continuing to work closely with AMC and servicing their cinema advertising needs under our exhibitor service agreement which has approximately 18 years remaining.

I'm also pleased that our management team stayed focused on growing revenue and adjusted OIBDA and improving our long-term prospects by continuing to increase and diversify our customer base and invest in our digital products to create an important extension of our core onscreen business. I look forward to 2019 and beyond as I work with Tom and our board to bring on a new CEO and with our exhibitor partners to continue to drive our strategic vision of leveraging our unique position in the media marketplace as the connector of brands to highly desirable movie audiences throughout their entire moviegoing experience.

And with that, I will now turn the call over to Katie to give you more details about our Q4 and full year operating performance and talk about our 2019 guidance estimates. Katie?

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Katherine L. Scherping, National CineMedia, Inc. - CFO [5]

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Thanks, Cliff. I'll walk through the results that Cliff highlighted in further detail, discuss our thoughts on the quarter and year as well as our outlook for 2019, then we'll open the call to your questions. We will be providing a supplemental presentation of these results on our website for your future reference.

For the fourth quarter, our total revenue decreased 2.3% or $3.3 million to $137.4 million versus $140.7 million in Q4 2017, driven by a 3.7% or $3.8 million decrease in national advertising revenue, partially offset by a 0.9% or $300,000 increase in local and regional advertising revenue and a 2.7% or $200,000 increase in beverage revenue from $7.2 million to $7.4 million.

Total Q4 2018 adjusted OIBDA decreased 7.7% or $6.4 million to $76.2 million from $82.6 million in the fourth quarter of 2017, and adjusted OIBDA margin decreased to 55.5% from 58.7% in Q4 2017. The decline in adjusted OIBDA was driven by a decrease in the high margin national business. As Cliff mentioned, we ended the year with an $8 million make good, which was a record for us. But it also served to mute the impressive sales efforts of our team toward the end of the year since the impressions were not there to deliver the revenue. We do expect to fully deliver on this make good in Q1.

In the fourth quarter, we recorded $8.1 million of integration and other encumbered theater payments from Cinemark and AMC associated with Rave Theatres and Carmike Theatres versus $9.3 million in Q4 2017 and $21.4 million for 2018 compared to $20.9 million earned in 2017. 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 or adjusted OIBDA as they are recorded as a reduction to net intangible assets on the balance sheet.

Our Q4 2018 advertising revenue mix was 71% national, 24% local and 5% beverage versus Q4 2017 that was 72%, 23% and 5%, respectively. Q4 national ad revenue decreased 3.7% versus Q4 2017, primarily related to a 5.2% decrease in CPMs, a 0.6% decrease in impressions sold, partially offset by an increase in branded content revenue. The decrease in impressions sold was the result of a 3.9% decrease in inventory utilization to 127.1% from 132.3% in Q4 2017. This was partially offset by a 3.5% increase in network attendance.

Q4 local and regional ad revenue rebounded from its Q3 performance and increased 0.9% or $300,000 versus the fourth quarter in 2017 and was driven by a 12% increase in average contract value partially offset by a 10% decrease in contract volume due to decreases in the volume of contracts over $100,000.

Q4 beverage revenue increased 2.8% or $200,000 versus Q4 2017, driven by a 2.2% increase in founding member attendance and a 1.1% increase in beverage CPMs. For the full year, our total revenue increased 3.6% or $15.3 million to $441.4 million from $426.1 million in 2017. Adjusted OIBDA slightly increased $300,000 or 0.1% to $205.4 million from $205.1 million in 2017, while adjusted OIBDA margin decreased to 46.5% from 48.1% in 2017. The dollar increase in adjusted OIBDA is driven by growth in high margin national advertising revenue due to a significantly stronger scatter market, up 27% in 2018 compared to last year.

Note the 2018 adjusted OIBDA results include $1.4 million of nonrecurring legal and professional fees related to our settlement with Standard General and a 7.6% or $5.5 million increase in theater access fees which are driven by founding member attendance related to the robust box office in 2018, and a 15.8% or $4.3 million increase in affiliate fees related to our increased revenue and new affiliate partnerships this year.

2018 saw $1.5 million less capitalizable internal labor due to many of our internally developed systems reaching a maintenance phase in 2018 from the development phases where internal labor was capitalized in previous years. Finally, we incurred $300,000 of expense related to our Denver headquarters office move in the spring of 2018.

Full year 2018 national ad revenue increased 5.3% due to a 2.9% increase in impressions sold and a 2.2% increase in CPMs. The increase in impressions sold was driven by a 7.5% increase in network attendance partially offset by a decrease in utilization to 113.4% from 118.5% in 2017. Finally, to reiterate again, our quarter end make good balance was a record $8 million versus $5.5 million a year ago.

For the full year, local and regional ad revenue decreased 1.9% or $1.9 million versus 2017. The increase in advertising revenue was driven by an 8.7% decrease in contract volume partially offset by a 6.2% increase in average contract value. The decrease in total contract volume was primarily related to a decrease in the number of contracts over $100,000 within the automobile and airline categories in 2018 compared to 2017. Full year beverage revenue increased 5% or $1.5 million versus 2017 driven primarily by a 6.5% increase in founding member attendance and a 1.1% increase in beverage CPMs.

Looking briefly at diluted earnings per share for the fourth quarter, we

reported GAAP diluted EPS of $0.21 versus EPS of $0.30 in Q4 2017. As adjusted for CEO transition costs and the impact for tax reform, diluted earnings per share for the fourth quarter of [2017] would have increased to $0.23, while the fourth quarter of 2017 would have decreased to $0.13 per diluted share. For the year, we reported GAAP diluted EPS of $0.37 versus EPS of $0.48 for 2017. As adjusted for CEO transition costs, the reversal of uncertain tax positions, early lease termination expense and the impact of tax reform, diluted EPS for 2018 would have remained $0.37 versus an EPS of $0.29 for 2017.

Our capital expenditures for 2018 were $15.4 million versus $12.3 million for 2017 driven by a $6.9 million investment in our digital ecosystem compared to $1 million a year ago as well as a $1.8 million in 2018 for the gross cost of relocating our corporate headquarters. We plan to continue to invest in our digital products in 2019 at similar levels.

Moving onto our balance sheet, our total debt outstanding at NCM LLC at the end of 2018 was $931 million versus $932 million at the end of 2017. Our revolver balance at the end of the fourth quarter in 2018 was $27 million versus $12 million outstanding at the end of the fourth quarter 2017. Our average interest rate on outstanding debt was approximately 5.7% at the end of Q4, including our $269.4 million floating rate term loan bank debt. 68% of our total debt outstanding at the end of 2018 had a fixed interest rate.

In Q4 we repurchased and retired $7.4 million of our 2026 senior unsecured bonds for $7 million. We were able to repurchase these notes at a discount averaging 5.3%. For the full year, we repurchased and retired $15 million of our 2026 notes that will have annual interest rate savings of approximately $870,000 or $6.7 million over the remaining life of the bonds. We may continue to opportunistically pay down debt as part of our strategy to maintain financial flexibility and a sustainable dividend for our stockholders.

Our total net leverage at NCM LLC as of the end of the year was approximately 4.2x trailing 4-quarter adjusted OIBDA plus integration payments versus 4.4x in Q4 2017, which is well below our consolidated net total leverage maintenance covenant of 6.25x. Our consolidated net senior secured leverage ratio was 3.1x versus the covenant of 4.5x.

Our consolidated cash and investment balances as of Q4 2018 increased by approximately $16 million to $76 million from the end of Q4 2017, with $69 million of this balance at NCM, Inc.

We announced today that the Board of Directors has authorized the company's regular quarterly dividend of $0.17 per share of common stock. The dividend will be paid on March 19, 2019, to stockholders of record on March 5, 2019. The dividend level was determined based on our plans to invest in the business over the next few years while providing financial flexibility. 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 over time a substantial portion of its free cash flow. The declaration, payment, timing and amount of any 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 conditions, available cash, current and anticipated cash needs, and any other factors that the Board of Directors considers relevant. Our annual dividend yield is currently 9.7% based on today's closing share price of $7.02.

Now turning to guidance, for the full year of 2019, total revenue is expected to be up between 1.9% and 5.3% versus 2018 or in the range of $450 million to $465 million. Adjusted OIBDA is expected to be up 1% to 5.6% or in the range of $207 million to $217 million.

Looking deeper into our adjusted OIBDA guidance for 2019, there are a couple of factors to consider. Our continued investment in our Noovie digital ecosystems includes an additional $3 million to $4 million in operating expense on top of the expense we incurred in 2018. We expect these investments to generate incremental revenue for the second half of 2019 and accelerating into 2020 and beyond. This includes the launch of our search and discovery platform for movies and games, Noovie.com, and the rollout in the first half of 2019 of our Noovie Trivia game. The contractual increase of 5% in theater access fees for our digital screen fees is expected to impact adjusted OIBDA by approximately $2.7 million in 2019.

It should be noted that to combat the inflationary pressures and increased digital investments, management has actively worked to optimize the cost structure of the business by reducing total headcount from 647 people at the beginning of 2016 to 538 at year-end 2018. In addition, the following are other assumptions that were made in preparing the projections that underly our 2019 guidance. We project beverage revenue to be flat to up 1% on a CPM increase of approximately 0.7%. We expect to receive $21 million to $23 million of integration payments and other income from theater payments from Cinemark and AMC associated with Rave Theaters and Carmike Theaters. We expect 2019 CapEx to be in the $15 million to $16 million range or a little over 3% of revenue. The digital capital investment portion will be $7 million to $8 million to invest in our Noovie digital platform and products and approximately $1 million related to additional capitalized labor.

We expect 2019 interest on borrowings to increase approximately $3 million to $57 million driven by higher average interest rates partially offset by lower average debt outstanding, which includes approximately $54 million of cash interests and $3 million related to the noncash amortization of deferred loan costs.

Turning now to NCM LLC's available cash calculation for 2019, starting with our adjusted OIBDA guidance of $207 million to $217 million, you'll add the following as a build to available cash. One, integration payments of $21 million to $23 million. Two, cash payments from the Fathom note receivable of $5.7 million. Note this is the last year we will receive payments for this note receivable. As a reduction to available cash, you will subtract the following. One, cash interest expense of approximately $53 million to $54 million. Annual scheduled debt principal amortization of $2.7 million plus any potential additional debt paydown up to $15 million annually. Capital expenditures of $15 million to $16 million. And four, noncash stock comp for Inc. employees of approximately $2.5 million to $3 million. These are the components that will allow you to arrive at a projection for available cash at NCM LLC in 2019, which would be paid to the 3 members of the partnership, Regal/Cineworld, Cinemark, and NCM, Inc., quarterly based on their ownership at the end of the quarter. In addition to the available cash distributed to NCM, Inc., NCM, LLC, and consistent with prior years, we project an approximate $5 million to be paid to NCM, Inc. from NCM LLC for management fees plus $1 million of interest earned on NCM, Inc. 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 arrive at the net cash available to fund dividend payments in 2019.

That concludes our prepared remarks, and Michelle, I'd like to open the line up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question come from the line of Eric Handler with MKM Partners. Please proceed with your question.

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Eric Owen Handler, MKM Partners LLC, Research Division - MD, Sector Head & Senior Analyst [2]

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Good afternoon, and thanks for taking my question. Katie, wonder if we could just talk a little bit about the guidance. And let's just for round number purposes assume revenue of 2% to 5%. How much of that do you feel will be national versus local? Or maybe what will be stronger? And then as you think about your national outlook for the year, do you expect it to be driven more by CPMs or utilization?

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Katherine L. Scherping, National CineMedia, Inc. - CFO [3]

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The mix we don't really expect to see change materially. So still about 70%, 71% national, 24%, 25% local/regional and the balance is beverage. From a national perspective, a lot of that depends on the pricing for CPM wise. Scatter was very strong in 2018. We see a lot more money upfront in 2019. We said our upfront is up a little bit more, so that will put a little bit of pressure on CPMs depending on where the scatter market ends up for the full year. So on a national basis, I would say CPMs up a little bit, but it all depends on the mix during the year.

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Eric Owen Handler, MKM Partners LLC, Research Division - MD, Sector Head & Senior Analyst [4]

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Okay, and then as a follow-up, as you think about your first quarter which is normally the slowest quarter of the year, you've got $8 million of make goods coming through which I imagine should help your utilization quite a bit and maybe leave you with less impressions to sell. Is that a fair impression or is that a fair statement to make?

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Katherine L. Scherping, National CineMedia, Inc. - CFO [5]

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I would say Q1 we always have a lot of inventory and we're not worried about being able to both deliver on the make good as well as be able to sell into all the available inventory that we want to sell into.

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Eric Owen Handler, MKM Partners LLC, Research Division - MD, Sector Head & Senior Analyst [6]

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Okay, great. Then one last quick question, as far as the affiliates are concerned for 2019, are there any planned new affiliates joining the network in the year? Or how should we think about that?

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Thomas F. Lesinski, National CineMedia, Inc. - Chairman [7]

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This is Tom. I can talk about that specific question. Typically, we don't comment on active discussions that we're having with affiliates. We are always evaluating new ones. So we don't want to go on the record to talk about that at this point on this call.

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Operator [8]

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

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Michael Joseph Hickey, The Benchmark Company, LLC, Research Division - Research Analyst [9]

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Congrats on the quarter and year. Thanks for taking my questions. Just to clarify Q1, obviously, you have a solid make good here, consensus is a little bit below Q1 2018. Should we think of Q1 as growing this year over prior year? Then I have a follow-up.

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Katherine L. Scherping, National CineMedia, Inc. - CFO [10]

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Yes, Mike, we're already -- where we sit today versus where we were a year ago, we're trending higher. So we're really optimistic about Q1 of 2019.

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Michael Joseph Hickey, The Benchmark Company, LLC, Research Division - Research Analyst [11]

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Good. Obviously, you have an active CEO search. It sounds like you have a few candidates. I'm guessing maybe we have someone new in the position here short term, but curious if any visibility on timing. And also sort of wondering, as you hit your numbers in 2018, cash looks good, reducing debt, you're guiding to some growth in 2019 in both sales and OIBDA. Just sort of how you reflect on the current strategy, if you think that's working and can sustain profitability. You're sort of moving in the right direction in investments that you made. And how that sort of fits into a new CEO coming in, any sort of visionary investment plans they may have. Thank you.

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Thomas F. Lesinski, National CineMedia, Inc. - Chairman [12]

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This is Tom. Right now, we're not going to comment specifically on the timetable that we have for a CEO, but we're optimistic that we'll have at least a candidate identified sometime in May. Having said, regarding your strategy question, we're happy with the current strategy and we know it's doing well, it's driving business both this year and going into next year. Having said that, our expectation is that a new CEO will add his own nuances and his own ideas going forward. Or her, for that matter. Sorry. Thank you, Katie.

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Operator [13]

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

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James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [14]

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Thanks. One more thing about the make goods issue and the development of it in recent quarters. Were there any particular issues you thought that drove the necessity for make goods? Was it ad positioning or anything else you'd point to that created it? And well maybe first go with that.

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Clifford E. Marks, National CineMedia, Inc. - President & Interim CEO [15]

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Yeah, it's Cliff. I'll answer that. The make good issue is primarily the result of the last 2 weeks of the year, the box that we had projected didn't achieve our numbers. So that was really what drove it for the -- drove it up to $8 million.

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Thomas F. Lesinski, National CineMedia, Inc. - Chairman [16]

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In addition to the ratings mix.

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Clifford E. Marks, National CineMedia, Inc. - President & Interim CEO [17]

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Yeah. For sure the ratings mix made a big difference. When you lose, when you have a lot less PG13 and R content, you have more G and PG, that kind of put us in a little bit of a tougher sales position as well for sure.

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James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [18]

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And this is one time where the make goods actually did hurt you in that you couldn't make up for it with either better pricing for the other available inventory or pushing it out to the next quarter when you had the available slots where it wouldn't have really had an impact?

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Clifford E. Marks, National CineMedia, Inc. - President & Interim CEO [19]

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That's true. Just the last 2 weeks of the year, you don't have the opportunity to make it good in a year.

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James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [20]

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Okay. The other thing, you laid out a pretty compelling argument that there shouldn't be any risk for the dividend given that your leverage has declined and you have quite a bit of cash on the books. But as Katie was outlining how you get to the cash available to pay the partners and pay dividends, I'm just wondering where -- are there any categories aside from OIBDA I guess that should be at risk or of benefit as we're looking out to give some assurance that you don't really have a big concern about a dividend cut since I think that's very important to investors in the stock.

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Katherine L. Scherping, National CineMedia, Inc. - CFO [21]

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Jim, even with the guidelines that I laid out with available cash, if you do the math all the way down, the payout ratio of cash coming in this year to the dividend as it sits at $0.68 pays out somewhere on average of about 80% of the total incoming cash flow to NCMI. So there's no risk there. It goes potentially as high as 90% payout depending on what your mix of those items were, those variables that I outlined. But you could be anywhere between 90% and 70% payout, but we feel like it's probably closer to 80% on average which is a very comfortable dividend payment at NCMI.

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James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [22]

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Okay. For the most part, it seems like you tried to match up what investors in NCMI get relative to what the founding members get, is that sort of a conscious decision or a constant theme you try to do?

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Katherine L. Scherping, National CineMedia, Inc. - CFO [23]

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We just want to illustrate kind of the cash flow coming from the partnership up to the 3 founding members, up to the founding members Regal and Cinemark and then NCMI so that everybody can do the math equally on where their adjusted OIBDA numbers in their models are coming out so that that flows all the way through to giving them confidence again with that dividend number.

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James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [24]

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Okay, and last question, you made a special mention of Kurt's involvement now at the board level, which I'm glad to hear of quite frankly also. Is there anything special you expect him to bring aside from just being a regular working member of the board?

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Thomas F. Lesinski, National CineMedia, Inc. - Chairman [25]

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I would say that Kurt brings just an unbelievable wealth of history and experience in the company. Both from a financial side and from an affiliate and exhibition side. So he is going to be involved across the company, but I think you know what his strengths are from all the years of working with him, and we're really happy to have him as one of our leaders on the board going forward.

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Operator [26]

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Thank you. We have reached the end of our question and answer session. I would like to turn the call back over to Mr. Marks for any closing remarks.

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Clifford E. Marks, National CineMedia, Inc. - President & Interim CEO [27]

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Thanks, Michelle. We've made great progress on our overall strategy in 2018. In the past year, we continued to introduce new Noovie digital products and to enhance our core business, paid down debt, strengthened our relationship with our exhibitor partners, and continued to pave the way for long term growth into the future. With the first quarter already looking strong and with an exceptional film slate coming for the rest of the year, we continue to feel very optimistic about 2019. Thank you for participating in our Q4 and full year 2018 earnings call and I'll see you at the movies.

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Operator [28]

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