U.S. Markets closed

Edited Transcript of NCMI earnings conference call or presentation 4-Nov-19 10:00pm GMT

Q3 2019 National CineMedia Inc Earnings Call

Centennial Nov 12, 2019 (Thomson StreetEvents) -- Edited Transcript of National CineMedia Inc earnings conference call or presentation Monday, November 4, 2019 at 10:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Clifford E. Marks

National CineMedia, Inc. - President

* Katherine L. Scherping

National CineMedia, Inc. - CFO

* Thomas F. Lesinski

National CineMedia, Inc. - CEO & Director

================================================================================

Conference Call Participants

================================================================================

* Eric Christian Wold

B. Riley FBR, Inc., Research Division - Senior Equity Analyst

* Eric Owen Handler

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

* James Charles Goss

Barrington Research Associates, Inc., Research Division - MD

* Jason K. Kim

Goldman Sachs Group Inc., Research Division - Senior Analyst

* Michael Joseph Hickey

The Benchmark Company, LLC, Research Division - Entertainment Software & Cannabis Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings. Welcome to the National CineMedia, Inc. conference call. (Operator Instructions) Please note, this conference is being recorded. I would now turn the conference over to your host, Katie Scherping. You may begin.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Darryl. Good afternoon, everyone. I'm 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 on 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 ncm.com.

Now with that, I'll turn the call over to Tom.

--------------------------------------------------------------------------------

Thomas F. Lesinski, National CineMedia, Inc. - CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Katie, and good afternoon, everyone. I assumed leadership role here at NCM roughly 3 months ago with a simple objective: to return to our public company roots by delivering a substantial dividend through long-term top line 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. And as always, Katie will provide more detailed results in our 2019 guidance, and then we will be open -- we'll 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 advertising distribution platform that is more data-driven and nimble in today's changing video advertising marketplace. 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 our make-good came 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 noncash 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 in scatter, closer and closer to their air date, 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 air dates 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 are 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 that 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 placements 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 those clients' overall spend. We've been able to increase the dollar value of our courtesy partner deals for 2020 to sponsor the silence your cell phones messaging at the end of our Noovie show as that segment of the show is now closer to the feature film. We're also receiving positive client responses to our new Noovie pre-show format with inventory after the advertised showtime 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 62nd unit that 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 gone through my first 100 days as a CEO, I'd like to share more details about the 5 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. As you know, we 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 showtime in our Noovie pre-show in Regal and Cinemark with the completion of the ESA amendment in mid-September. We are marketing the 5 minutes of inventory that began at the advertised showtime as our "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 their placement will now be closer to the advertised showtime. While there will be some incremental fixed and variable costs associated with this change, given the higher expected sell-through in 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 Noovie 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 for lights-down 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 long-time technology clients. We've also had strong interest in the Platinum inventory for major clients in the digital media space, technology, auto and apparel categories for Q4 and many other major clients in 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 critical. We had hoped to bring our new inventory to the market a little earlier in the year to take better advantage of the upfront marketplace. We were only able to begin selling advertising since mid-September once the ESA amendments were signed. While we are not able to take full advantage of selling Q4 inventory, the significant interest we're seeing for both the lights-down and platinum inventory for 2020 is very encouraging.

In addition to this new and improved inventory, we are actively working on new ways to reinvent our Noovie 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 a 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 to design, to solve the speed-to-market friction issues associated with our cinema product is underway, and we expect full implementation will occur late in 2020 or early 2021.

The third growth pillar 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 into 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 to their moviegoing 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 future growth.

We continue to expand our Noovie digital ecosystem and user fan -- and user base of movie fans with NCM owned and operated products like noovie.com, Noovie ARcade, Noovie Shuffle, 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 to 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 expect it 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 consist 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 Noovie 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 moviegoer 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 moviegoer later walks 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 and scale our theater audience to a critical mass to be able to effectively use that audience data 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 in markets we're 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 a handful of major exhibitors who are currently part of our network and whose cinema advertising contracts will be coming up for renewal that we think will 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 Noovie show format with lights-down and platinum advertising.

While adoption across our fleet networks 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 am very optimistic about NCM's future. The movie slate for the rest of the year looks strong with several proven tentpole franchises, including Maleficent; Charlie's Angels; Frozen 2; Jumanji: The Next Level; and of course, Star Wars: The Rise of Skywalker.

We have launched our new Noovie format with lights-down and Platinum inventory. Our digital products are resonating with both brands and consumers. Our consumer databases are expanding. We are -- and we have continued great support from our exhibitor partners.

The 2020 upfront 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 cinema's valuable, young, engaged audiences both in the captive theater environment and anytime, anywhere on their mobile devices. We believe this positive market environment, combined with the successful execution of our 5 strategic pillars for growth that I 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 is 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 WarnerMedia. 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 venting from her fresh perspective on exhibition, media strategy, marketing and cinema advertising. So welcome, Donna.

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

--------------------------------------------------------------------------------

Katherine L. Scherping, National CineMedia, Inc. - CFO [4]

--------------------------------------------------------------------------------

Thanks, Tom. I'll 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 in 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 revenues.

Total Q3 adjusted OIBDA was $51.7 million, a decrease of $1.9 million or 3.5% versus Q3 2018. The adjusted OIBDA 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 onetime $2 million noncash 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-point -- 5% annual increase in digital screen fees, partially offset by founding member attendance decreasing 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 a 1.9% increase versus $80.8 million in Q3 2018. The change was driven by a 0.4% increase in impressions sold and higher branded content revenue, partially offset by a 9% decrease in CPMs. 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 CPMs 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 $400,000 from $4.5 million to $4.1 million versus the third quarter in 2018 and was primarily due to a decrease in adverse 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 on-screen 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 CPMs 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 9 months of 2019, total revenue decreased 2.1% or $6.4 million to $297.6 million from $304 million in the first 9 months of 2018. Adjusted OIBDA decreased $5.2 million or 4% to $124 million from $129.2 million in the first 9 months of 2018. And adjusted OIBDA margin decreased to 41.7% from 42.5% versus the first 9 months of 2018.

Excluding the $2 million noncash, onetime Q3 investment impairment, adjusted OIBDA would have only decreased 2.5% versus the same 9 months in 2018. This noncash investment impairment charge recorded this year represents a final write-off of these investments that we had recorded from several years ago.

For the first 9 months of 2019, National ad revenue was $213.9 million, a $500,000 or a 0.2% decrease versus the first 9 months of 2018. The decrease was driven by a 4.8% decrease in CPMs, a 0.8% decrease in impressions sold, partially offset by an increase in branded content. The slight decrease in impressions sold was the result of an increasing utilization to 116.7% from 109.1%, offset by network attendance that decreased 7.2% versus the first 9 months of 2018 that was driven by a record box office last year.

For the first 9 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 10 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 incentive to package their theaters into multi-theater deals.

In both cases, there's 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 of safe, engaging, entertaining environment free of political 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 on TV and the Internet, which may also help with audience engagement throughout the year.

For the 9 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 contract, 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 moviegoing experience, which provides for higher average contract values.

For the first 9 months of 2019, Beverage revenue decreased 7.5% or $1.8 million from $24 million to $22.2 million versus the first 9 months of 2018 due to 6.7% decrease in founding member attendance, partially offset by a slight contractual increase in beverage CPMs.

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 9 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 9 months of 2018 as a result of deferred tax expense decreasing $10.7 million from the first 9 months of 2018 due to the remeasurement of our deferred tax assets in 2018 and as a result of state tax law changes.

For the first 9 months of 2019, capital expenditures were $10.5 million versus $11 million spent in 2018. We are estimating that our 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 investment.

In the third quarter and for the first 9 months of 2019, we recorded $5.6 million and $13.7 million, respectively, of integration and other encumbered theater payments associated with AMC Rave Theatres and AMC Carmike Theatres versus $5.5 million and $13.3 million, respectively, in 2018. As a reminder, this 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. 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 Theatre integration payments of approximately $19 million will continue through the remaining term of the AMC ESA through 2037.

And 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 6 years to April 2028 and reduces the interest rate from 6% to 5.875%. We will pay interest on the note semiannually 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 notes at par value. As a result of this transaction, interest savings are expected to be $500,000 annually versus the 6% notes. The refinancing positions us 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 NCM LLC 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 on all debt was approximately 5.7% for both periods, including our $267 million floating rate term loan bank debt and 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 and Board approval. For the 9 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 retired 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 leverage levels, alternative investment opportunities and our public company dividend policy.

Our total net leverage at NCM LLC as of the end of Q3 was approximately 4.2x trailing 4 quarter adjusted OIBDA, 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 a covenant of 4.5x.

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 4 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 has authorized the company's regular quarterly cash dividend of $0.17 per common share of stock. The dividend will be paid on November 29, 2019, to stockholders of record on November 14, 2019. With over 4 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 7 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 reserved at NCMI that will ensure the long-term sustainability of our dividend while paying at a substantial portion of our available cash to shareholders.

The company intends to pay our 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 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. With our third quarter ending a bit softer than expected and a lower-than-expected result of selling our lights-down and 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% to up 1% and adjusted OIBDA guidance to $195 million to $205 million or down 5% to flat. This guidance includes the year-end 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 1 to 2 weeks of our fiscal year, which ends on December 26, which includes only the opening week for the release of Star Wars. The last 5 weeks of the year are 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 by 1 or 2 last-minute deals in addition to the fluctuation of our make-good balance. For instance, as Tom mentioned, we just recently sold our first 62 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'll add the following as a build 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 boundary purchases 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, noncash 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 member circuits 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 year's, we project approximately $5 million to be paid to NCMI from NCM LLC for management fees, plus $1.5 million of interest earned on the 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 of approximately 90% at our guidance midpoint.

This concludes our prepared remarks, and we'll now open the line for questions. Darryl?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Eric Handler of MKM Partners.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Tom, just wonder 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 1 person to buy the Platinum Spot, which is great. But I'm just thinking of playing or trying to balance higher prices versus closer to airtime for movies. What's been the reaction from clients there?

--------------------------------------------------------------------------------

Thomas F. Lesinski, National CineMedia, Inc. - CEO & Director [3]

--------------------------------------------------------------------------------

The reaction to the Platinum Spot, in particular, has been really positive. And the announcement about moving 5 minutes into the post-showtime period has also been really positive. It's really been a matter of timing. We've only been in the marketplace for a little over 4, 5 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 Owen Handler, MKM Partners LLC, Research Division - MD, Sector Head & Senior Analyst [4]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thomas F. Lesinski, National CineMedia, Inc. - CEO & Director [5]

--------------------------------------------------------------------------------

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 2 on how you feel the program has been going, this would be a good time to do it.

--------------------------------------------------------------------------------

Clifford E. Marks, National CineMedia, Inc. - President [6]

--------------------------------------------------------------------------------

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 the market. But the response, Eric, has been excellent.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

Our next question comes from the line of Mike Hickey of The Benchmark Company.

--------------------------------------------------------------------------------

Michael Joseph Hickey, The Benchmark Company, LLC, Research Division - Entertainment Software & Cannabis Analyst [8]

--------------------------------------------------------------------------------

Curious on the lights-down, just to follow up some question. Is it more difficult (inaudible) subscription trying to sell the average showtime inventory when you don't have your full network participating in that adjusted programming in AMC and sign up (inaudible)? Does that make it harder on you, Cliff?

--------------------------------------------------------------------------------

Thomas F. Lesinski, National CineMedia, Inc. - CEO & Director [9]

--------------------------------------------------------------------------------

Cliff, do you want to answer that?

--------------------------------------------------------------------------------

Clifford E. Marks, National CineMedia, Inc. - President [10]

--------------------------------------------------------------------------------

Yes, yes. What we're selling is a network that is partially our old program lineup and partially are new. Our advertisers and agencies understand that it's going to take some time to get volume 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 exhibitions -- some exhibitors time to get comfortable with it, and they respect it. It has not been difficult at all.

--------------------------------------------------------------------------------

Michael Joseph Hickey, The Benchmark Company, LLC, Research Division - Entertainment Software & Cannabis Analyst [11]

--------------------------------------------------------------------------------

Okay. And then I guess some prior Q4s or otherwise you had a major Star Wars (inaudible). I seem to remember demand being significant enough that you were selling out your inventory but actually stretching some of those buys, call it, next quarter, [2Q, 1] this time around. Is that similar this time or is it less demand sort of advertised on the Star Wars [2Y-2Y] period?

--------------------------------------------------------------------------------

Katherine L. Scherping, National CineMedia, Inc. - CFO [12]

--------------------------------------------------------------------------------

Yes. I think what' you're asking -- and let me try to paraphrase it because we're having a hard time hearing you, Mike. So you can tell me if I'm off-base with what I thought I heard you say. You were asking about, does the Q4 sellout bleed into Q1 with the demand in advertising? Are you talking about make-good? Or are you talking about the fact that Star Wars is only running for the last week of the year and people want to advertise in front of Star Wars' move to Q1 as well?

--------------------------------------------------------------------------------

Michael Joseph Hickey, The Benchmark Company, LLC, Research Division - Entertainment Software & Cannabis Analyst [13]

--------------------------------------------------------------------------------

That's right. Yes. Remember, the demand has been high enough that you would sell out sort of Star Wars (inaudible) so some of that -- some of those buys were sort of creep into Q1 as well. So that's sort of how I -- significant demand from media buyers and these sort of -- in front of movie patrons (inaudible). I'm just curious if similar -- if the demand is similar to what you've seen in prior quarters if Star Wars films come out?

--------------------------------------------------------------------------------

Katherine L. Scherping, National CineMedia, Inc. - CFO [14]

--------------------------------------------------------------------------------

Yes. We would expect Q1 of 2020 to benefit from Star Wars for us. Only really the first week is in our 2019 number. So Q1 would be the most benefiting of the Star Wars ads.

--------------------------------------------------------------------------------

Michael Joseph Hickey, The Benchmark Company, LLC, Research Division - Entertainment Software & Cannabis Analyst [15]

--------------------------------------------------------------------------------

The last question for me, I guess, with the lights-down inventory. You're also moving your Local and Regional ad spots closer to showtime. Are you seeing the positive impact from those buyers now that you're getting their ads a little closer to showtime [and what that could mean]?

--------------------------------------------------------------------------------

Thomas F. Lesinski, National CineMedia, Inc. - CEO & Director [16]

--------------------------------------------------------------------------------

I think it's fair to say that we've been -- well, Cliff, go ahead. Let me say just 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 showtime, that the Local and Regional advertising becomes more valuable as well.

But, Cliff, why don't you talk to that as well?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Well remember, it 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'll have inventory closer to showtime now. But now, Mike, we've got to go out and reeducate people about this because it's been a long time that they've known our show to be 1 format. So it's going to take some time for us to go reeducate a lot of Local and Regional clients, but unequivocally, it's looked at highly positively.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Our next question comes from the line of Eric Wold of B. Riley & Co.

--------------------------------------------------------------------------------

Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [19]

--------------------------------------------------------------------------------

A few questions just on -- trying to understand the dynamics around scatter and timing of 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 know that some of the pressure on CPMs in the quarter was due to lower scatter purchases and more of a mix -- a shift to more kind of upfront purchases. But then you also noted that advertisers are moving -- increasingly moving to more last-minute scatter purchases closer to campaign. I guess there's kind of 2 questions from that. One, when would you expect that dynamic to trough and potentially start to benefit results from more of a mix shift towards scatter? And then two, I guess, normally, you expect the shift to scatter to be more positive for CPMs. But I guess is there -- you know that there's so many choices out there that can make this last-minute decision without much concern about spending their dollars. Does that indicate that online CPMs are likely to be pressured even with that shift to scatter?

--------------------------------------------------------------------------------

Katherine L. Scherping, National CineMedia, Inc. - CFO [20]

--------------------------------------------------------------------------------

I think there are 2 questions there. One is a timing of when we -- in the pipeline when we have scatter deals. Because of the nature of scatter, they're placed 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 over time as we got closer to the end of the quarter.

And then from a CPM standpoint, the less scatter dollars you have on a year-over-year basis is what drives the CPM as a percentage down. So when we saw -- we had about 27% decline in the CPM revenue year-over-year. So when you have that scatter revenue, sorry, you have pressure on the CPM. So the scatter dollars typically are higher premium-priced CPMs, but when we saw the pipeline evaporating, that impacted Q3 this year for us.

--------------------------------------------------------------------------------

Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [21]

--------------------------------------------------------------------------------

Okay. That's helpful, Katie. I guess more on a go-forward basis, though. If advertisers are increasing -- 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, had to pay up to get their needs. I mean is that fair? Or do you still expect scatter to -- scatter pricing to continue to be higher even in that environment?

--------------------------------------------------------------------------------

Thomas F. Lesinski, National CineMedia, Inc. - CEO & Director [22]

--------------------------------------------------------------------------------

I think we still think scatter will go higher. I think it's more a convenience than 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 ad. But I think they're 2 different things. And I think one is a operational thing, and one is a pricing thing, and we don't see those as being related. I don't know, Cliff, if you want to opine on that as well, you can.

--------------------------------------------------------------------------------

Clifford E. Marks, National CineMedia, Inc. - President [23]

--------------------------------------------------------------------------------

Well, yes, Eric, what I would tell you is the good news is, is that we've got a lot more of our scatter dollars to be committed upfront. That's a good thing. We lock it in, we know it's on the books, and it's ours. Now, of course, that comes at 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 those higher CPMs. And that scatter's out there. We're just fighting for it with more advertisers, with more media companies than there ever were. But there is a lot of upside still to us creating a lot of new scatter clients that just don't exist today, especially with this new inventory. This new inventory is going to attract some brands. I've talked to many of them myself, brands that 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 will be last-minute and be premium.

--------------------------------------------------------------------------------

Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [24]

--------------------------------------------------------------------------------

Okay. And then just final question, if I may. I don't know if anything changed in general, I guess, with that kind of move to close, but I guess how close is the spending happening to campaigns in general from your point of view? I know you noted that, obviously, someone could buy Facebook ad an hour before they want to, but it's not possible in theaters. So for NCM, how close is the spend happening to a campaign or some kind of screens because thinking about you sort of marketing the new post-showtime strategy in mid-September but noted that it was too late to impact Q4 as the dollars had been spent. So I guess how far in advance is that kind of cut-off these days?

--------------------------------------------------------------------------------

Clifford E. Marks, National CineMedia, Inc. - President [25]

--------------------------------------------------------------------------------

Well, I think you're asking 2 different questions. I mean we write business a week before. I mean we'll write a deal on a Thursday that will start on a Monday or Tuesday. I mean that's not so uncommon. We just wrote a big fourth quarter scatter deal like that.

The situation with the money that we -- that had kind of dried up the fourth quarter, when you're looking for big money for these platinum deals or big money for these post-showtime deals, that -- a lot of that was committed early, it was committed upfront. But there is a lot of scatter that breaks that we write sometimes a week before or same week of. And now on Tom's point, we like to be even -- we like to be able to do it day of or 2 days before, but we're just not there yet.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [27]

--------------------------------------------------------------------------------

A couple of them. First, in terms of the approach of selling the Platinum Spot, are you looking at generally a single advertiser to block off films for, say, a consumer product with broad 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?

--------------------------------------------------------------------------------

Thomas F. Lesinski, National CineMedia, Inc. - CEO & Director [28]

--------------------------------------------------------------------------------

One of the things that's flexible about our network is the ability to customize a buy, 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 little 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.

--------------------------------------------------------------------------------

James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [29]

--------------------------------------------------------------------------------

Okay. So you might do serve a mix of those 2 approaches. Is that what you're basically saying?

--------------------------------------------------------------------------------

Thomas F. Lesinski, National CineMedia, Inc. - CEO & Director [30]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [31]

--------------------------------------------------------------------------------

If somebody will buy everything, obviously, you're willing -- okay. I think you mentioned you were using some technologies for identifying moviegoers entering the theaters and following up with relevant ads. Now I'm wondering if you're thinking about or experiencing a likelihood of some pushback as customers notice this connection?

--------------------------------------------------------------------------------

Thomas F. Lesinski, National CineMedia, Inc. - CEO & Director [32]

--------------------------------------------------------------------------------

We have not done any pushback. 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 their 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.

--------------------------------------------------------------------------------

Clifford E. Marks, National CineMedia, Inc. - President [33]

--------------------------------------------------------------------------------

Well, 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.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

Our final question comes from the line of Jason Kim of Goldman Sachs.

--------------------------------------------------------------------------------

Jason K. Kim, Goldman Sachs Group Inc., Research Division - Senior Analyst [35]

--------------------------------------------------------------------------------

So in terms of the shorter lead cycle for advertisements, what sort of technology or other investments do you think you 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?

--------------------------------------------------------------------------------

Thomas F. Lesinski, National CineMedia, Inc. - CEO & Director [36]

--------------------------------------------------------------------------------

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 2 years ago, really, in the planning phases. We haven't actually commented on the size of that investments, but I think we can get to that probably next year when we actually get to our full year forecast and guidance for 2020. But I can assure it's a major initiative of our company, and it's a significant opportunity and investment for our company as well.

--------------------------------------------------------------------------------

Katherine L. Scherping, National CineMedia, Inc. - CFO [37]

--------------------------------------------------------------------------------

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 systems. 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.

--------------------------------------------------------------------------------

Jason K. Kim, Goldman Sachs Group Inc., Research Division - Senior Analyst [38]

--------------------------------------------------------------------------------

I've got it. That's helpful. And then in terms of the guidance reduction for the year, so under the implied fourth quarter guidance after your third quarter results, how much of your sort of a guidance, that takedown, is related to just being a little bit more conservative with the scatter business versus so much of the business just coming at the very last week of the year, so just leaving some room for conservatism? Like what are you attributing to the -- in terms of adjustments to your own assumptions there?

--------------------------------------------------------------------------------

Thomas F. Lesinski, National CineMedia, Inc. - CEO & Director [39]

--------------------------------------------------------------------------------

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 back-end-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's 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.

--------------------------------------------------------------------------------

Katherine L. Scherping, National CineMedia, Inc. - CFO [40]

--------------------------------------------------------------------------------

Yes. I mean I think there are definitely some moving parts to the end of the year, which may drive that $8 billion (sic) [million] make-good either positive from that or negatively from that. So it just depends on how Star Wars opens up against the projection that everybody is estimating. And then we're in the full 5 weeks. The last 5 weeks of the year are 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 toward the end of the quarter. So we're being cautious about that, I think, is how I would put it.

--------------------------------------------------------------------------------

Thomas F. Lesinski, National CineMedia, Inc. - CEO & Director [41]

--------------------------------------------------------------------------------

Okay. Thanks for the questions. Go ahead.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thomas F. Lesinski, National CineMedia, Inc. - CEO & Director [43]

--------------------------------------------------------------------------------

Thank you for your questions. I'm very proud to be leading NCM and its talented and hardworking 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 have 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 impressions 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 media 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.

--------------------------------------------------------------------------------

Operator [44]

--------------------------------------------------------------------------------

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