National CineMedia, Inc. (NASDAQ:NCMI) Q4 2023 Earnings Call Transcript
National CineMedia, Inc. (NASDAQ:NCMI) Q4 2023 Earnings Call Transcript March 18, 2024
National CineMedia, Inc. beats earnings expectations. Reported EPS is $0.2, expectations were $0.1. National CineMedia, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and welcome to the National CineMedia Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Chan Park, Vice President of Finance. Please go ahead.
Chan Park: Good afternoon. I'm joined today by our Chief Executive Officer, Tom Lesinski; and our Chief Financial Officer, Ronnie Ng. I would like to remind our listeners that this conference call contains forward-looking statements within the meaning of 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 or on the Investor Relations page of our website at ncm.com. Now, I'll turn the call over to Tom.
Tom Lesinski: Thank you, Chan, and good afternoon everyone. Welcome to our fourth quarter and full year 2023 earnings call. The relevance of cinema to audiences and brands with box-office hits like Barbenheimer, Taylor Swift: The Eras Tour, and Super Mario Bros. all demonstrating the cultural power of cinema. By comparison, more moviegoers aged 18 and up went to the opening weekend of Barbenheimer than attended all four major league sporting events over 12 months. For example, Taylor Swift's concert film also drove significant demand, drawing in over 4 million attendees. That's five times more than her entire U.S. live concert tour. Additionally, the success of films like Super Mario Bros. Movie became the number two grossing PG-rated film of all time with over 52 million attendees and continues to remind us of cinema's uniquely great ability to reach families.
So turning to fourth quarter, NCM attendance exceeded 82 million, reaching 94% of 2002 levels. Fourth quarter attendance levels were largely impacted by strike-related delays that pushed a number of strong releases into 2024 and beyond, including Dune: Part Two, Ghostbusters: Frozen Empire, and Kraven the Hunters. These changes to the slate negatively impacted attendance by approximately 20 million. If these films were not pushed due to the strike, we estimated that our total fourth quarter attendance would have been likely crossing a 100 million, surpassing fourth quarter 2022 levels. It is clear to us that consumer demand for the cinema remains strong and audiences are excited to see the latest movies on the big screen first. For the fourth quarter of 2023 underscored the enduring appeal of the cinematic experience for American consumers.
Our core demographic, Gen Z and Millennials, remains the cornerstone of the cinema audience, representing 70% of our viewership with a cumulative reach of 32 million individuals for the quarter. Notably during this period, Gen Z made up 41% of our audience, demonstrating a strong average weekly rating of 5.5. This rating significantly surpasses other premium video offerings, including NBC Sunday Night Football, which had an average rating of 2.2. This kind of robust engagement underscores the considerable enthusiasm that this influential demographic holds for the in-theater cinema experience. The biggest brands continue to turn to NCM as they realize the power of being united with millions of young diverse consumers who are at the movies each and every week.
The fourth quarter of '23 also proved that consumers are going to the movie theaters to see more than just traditional Hollywood films, with brands quickly following to get in front of these highly engaged audiences. We saw this with Taylor Swift: The Eras Tour, where NCM sold out all of our available inventory for the initial four weeks. Specifically, NCM facilitated 32 new ad deals for this film, including 12 with previously unassociated brands. More than half of these brands were our industry leaders, holding in either number one or number two position in the marketplace. This trend extended even to non-Hollywood productions such as Godzilla Minus One and The Boy and the Heron, which also attracted sizable diverse audiences. Turning to our results, NCM's fourth quarter '23 revenue was $90.9 million, comparable to the fourth quarter of 2022.
These results were driven primarily by national sales and slightly offset by local sales. We are very pleased that NCM kept pace on revenue in the fourth quarter, despite a 6% drop in audience related to the impact of the actor's strike on the release schedule. This is largely due to the resilience of our business model and strong performance across our organization. In fact, NCM set a record in the fourth quarter of 2023 for its highest revenue per attendee in the company's history. National revenue for the fourth quarter was up 2% compared to the same period in the prior period. Approximately 71% of the fourth quarter's national revenue was attributable to longer term upfront commitments and the fourth quarter saw much better scatter marketplace participation than in the same quarter the prior year, with 83 active national advertisers compared to 58 in the fourth quarter of 2022, representing a 43% increase.
Local demand continued to be led by government marketing initiatives, but also saw a much greater category diversity than in past years, as cyclical industries such as restaurants, non-alcoholic beverages, arts and entertainment contributed a greater percentage of local revenue than the same period in the prior year. Turning to the full year and quarterly box office results. 2023 box office levels were at their highest point since 2019, proving the resilience of the cinema industry. For the full year '23, the domestic box office was 8.9 billion, up 21% versus the prior year, and at 78% of 2019 levels, driven by films like Barbie, Super Mario Bros., Spider-Man, [Across the Universe], Guardians of the Galaxy, and Oppenheimer. Fourth quarter box office came in at $1.9 billion, approximately up 5% year-over-year, and at 64% of 2019 levels, led by of course Taylor Swift and The Hunger Games, which brought in 179 million and 159 million, respectively.
Over the past 18 months, a slower ad market has impacted demand across both linear and traditional media. However, as a result of NCM's differentiated offerings and high ROI for advertisers, our revenue has been resilient in the face of tighter ad budgets. This said, in the fourth quarter we began to see an ad spending bounce back across all channels and expect a more significant rebound as the consumer environment improves and inflation continues to normalize over the coming quarters. This quarter we released key findings from our second attention study, which was completed by Lumen Research, a leading attention technology company, in October of '23. The study measures attention across 14 categories, covering a variety of ad links and an expanded list of competitors and mediums.
This study proved yet again that cinema continues to rank number one in terms of attention. Cinema's attention advantage is two to three times that of live sports, FAST nets, premium AVOD, and digital premium and podcasts, and it's seven to sixteen times higher than that of social or digital media. Cinema saw year-over-year growth in average seconds viewed, up 17% for a 30-second spot compared to our previous study conducted in November of '22. Attention scores remain high across key demographics, including the hard-to-reach Gen Z audiences. The study also demonstrated that attention proves to be consistent across all ad links and both blockbusters and smaller indie movies. NCM's work with Lumen once again showcases cinema advertising's unique ability to create captive audience and high ROI for brands.
Building off this new study, NCM also partnered with Adelaide, a leading company in attention measurement, to provide attention rating guarantees for our cinema advertising clients. This is the first time this innovative solution has been offered by a premium video platform. These new guarantees enable NCM and Adelaide clients to transact against the attention metric, allowing for an apples-to-apples quality comparison across sites, placements, platforms, channels, and more. With attention rating guarantees, NCM's offerings are even more attractive as brands who choose to advertise with us are assured of results in an otherwise opaque environment. NCM is redefining the movie experience for brands by offering advertisers the opportunity to make cinema advertising part of their multi-channel marketing experience.
As we continue to work with to transform cinema advertising, NCM is providing advertisers with a wide range of custom content solutions that drive scalable impact, including turnkey editorial sponsorships in our category of leading pre-show, show takeovers with long-form branded films, immersive experiential activations in theater lobbies, and much more to drive a connection between brands and consumers, creating shareable social media moments that reach far beyond the individual moviegoer. Take for example a new 15 minute short film from the leading cosmetic company, ELF, that debuted ahead of the Mean Girls movie on January 12. This is the longest brand content film NCM has ever aired on a big screen to date, with an unprecedented 167% lift in awareness and 94% ad recall.
NCM's industry leading reach ensures that it can take advantage of these trends. We're also looking for new ways to offer brands more opportunities to advertise on screen. We're continuing to enhance NCMx, the most powerful data platform in cinema, with new research capabilities and heightened data intelligence to drive business outcomes. After extensive testing over the past year, we are rolling our business guarantees for relevant ad campaign KPIs, such as web traffic, app downloads, foot traffic, and sales lists, another first in the cinema advertising business. These new initiatives will leverage our industry-leading deterministic data on the moviegoing audiences to help brands optimize their spending. Additionally, this quarter, we completed our programmatic ad platform beta launch and conducted testing of self-serve buying of cinema ads.
These programs will broaden the potential NCM advertising pool by expanding the ways in which current and new advertisers can tap into the company's highly valued big screen inventory. Through programmatic, brands can access real-time, data-driven trading of cinema ad inventory, and through self-serve, brands can plan, buy, schedule, and create their own cinema ads thrown on the big screen, from a single auditorium to 18,000 screens. Over time, we expect these initiatives to lead to high commercial utilization across the NCM network. As we look ahead into the first quarter of '24, NCM expects to earn total revenue of $34.5 million to $35.5 million. The first quarter started off with great films, with the release of Dune 2, Mean Girls, The Beekeeper, and we look forward to the release of Ghostbusters: Frozen Empire coming this weekend.
Importantly today, we also announced that our Board has approved a new $100 million share repurchase program, which runs through the year 2027, representing our confidence in our business and into the future. Our intent is to use this program opportunistically to repurchase shares at prevailing market prices. Ronnie will discuss the news in greater detail later in the call. The future of cinema advertising is bright, and we're continuing to take steps to prove our value proposition and optimize long-term box office momentum. NCM has an unparalleled premium video advertising platform, and with innovations underway, we are set up to deliver impactful brand campaigns and continue to drive ROI on cinema advertising spend, positioning our great business for growth and continued success.
With that, I'll turn the call over to Ronnie to provide you with more details on our operating results and future outlook.
Ronnie Ng: Thank you, Tom, and good afternoon. Before I discuss the results of the quarter and full year, I want to note that today I will be discussing NCM LLC's operating results as it relates to full year 2023, which would have been similar to NCM Inc.'s results if the businesses were consolidated for the entirety of the year. We are delighted to deliver strong results as NCM finished a year on a high note, with our sales fundamentals continuing to improve. As Tom mentioned, the fourth quarter of 2023 set a record for the highest revenue per attendee since the inception of the company. The combination of our ability to capture more revenue per attendee in our disciplined expense management resulted in stronger than expected adjusted OIBDA for the quarter and full year.
During the first quarter, since we emerged from our Chapter 11 process, our management and sales teams successfully drove record high monetization of impressions. Excluding beverage revenue, revenue per attendee for the fourth quarter was $1.07, up more than 7% compared to the fourth quarter of 2022 and over 17% higher compared to the same period in 2019. Despite lower year-over-year attendance in the fourth quarter due to the writers and actor strikes, we were able to significantly increase total advertising spend from certain key advertisers. The top 10 national advertisers from this quarter increased their spend by over 42% collectively compared to the fourth quarter of 2022. Additionally, we saw strong growth across a number of traditional categories such as financial services, consumer packaged goods, and health care.
Although we continue to navigate through a choppy advertising market, we experienced growth in both the upfront and scatter markets. The improvement in both markets was the result of improved utilization and firm pricing discipline during the quarter. In fact, both pricing and utilization for the quarter were both well above 2019 levels by 14% and 16% respectively. NCM's total revenue for the fourth quarter was $90.9 million, which was comparable to the $91.7 million in the same period in the prior year and exceeded our revenue guidance of $85 million to $88 million. National advertising revenue increased to $71.9 million, up 2% compared to $70.4 million in the fourth quarter of 2022, driven by a 14% increase in utilization and slightly higher CPMs, but offset by 6% decrease in attendance.
Local and regional advertising revenue was $16.2 million, down 5% compared to $17.1 million in the fourth quarter of 2022, driven primarily by decreased activity in the eastern region and reduced spend within the government and travel categories. Turning to our expenses, fourth quarter operating expenses were $69.6 million compared to $63.6 million in the prior year. This variance was driven by two factors. First, an increase in amortization expenses associated with purchase price adjustments to NCM LLC's intangible assets upon reconsolidation on August 7, 2023. And second, an increase in expenses incurred due to NCM LLC's Chapter 11 case and related appeals. Excluding charges related to our financial restructuring, other one-time items, depreciation, amortization, and non-cash share-based comp, our adjusted operating expenses for the fourth quarter of 2023 were $51.1 million, 3% higher compared to $49.6 million during the same period of last year.
The increase in adjusted operating expenses was related to slightly higher theater access fees and affiliate costs as a result of the new Regal affiliate agreement, higher professional fees, and slightly higher personnel costs. As a reminder, since the new Regal relationship is an affiliate agreement, the expense of the agreement was reclassified from ESA ,theater access fees and revenue share to advertising operating costs. Fourth quarter adjusted OIBDA, excluding non-cash charges and one-time items, was $39.8 million compared to $42.1 million in the prior year. The result was well exceeded our guidance range of $30 million to $33 million. Adjusted OIBDA was driven by lower than expected fees paid to ESA and affiliate partners, tighter management of operating expenses, and steady revenue despite lower attendance.
Total free cash flow for the quarter, as defined by cash flow from operations less capital expenditures, was negative $2.8 million. However, when excluding restructuring related expenses, the quarter would have generated positive free cash flow of $4.3 million. Turning to the full year, in 2023, NCM generated $259.8 million in total revenue, which was up 4%, compared to total revenue of $249.2 million in 2022. These results were largely driven by local, up 18%, compared to the prior year. Specifically, local saw a 28% increase in activity from the current year's top 10 advertising categories, with notable gains in the government, healthcare, and education service categories. National revenue for the year, was up 2% year-over-year, driven by a 9% increase in impressions sold, and an 11% increase in network attendance, compared to 2022.
Turning to our expenses, we incurred a significant amount of one-time expenses related to our Chapter 11 restructuring in 2023. For full year 2023, operating expenses were $440.7 million, which included $233.6 million in charges related to our financial restructuring, other one-time items, depreciation, amortization, and non-cash share-based compensation. Excluding these charges, our adjusted operating expenses for 2023, were $207.1 million, 8% higher, compared to the same period last year, of $191.9 million. The increase in adjusted operating expenses was largely related, to the 10% higher theater access fees, and affiliate costs, due to the increased attendance from the new Regal affiliate agreement. Full year 2023, adjusted OIBDA, excluding non-cash charges and one-time items, was $52.7 million, compared to $57.3 million in 2022.
Again, our full year results substantially exceeded the midpoint of our estimates, due to the previously mentioned rationale. Total free cash flow for the year, was negative $48.8 million. However, when excluding restructuring related expenses, free cash flow for the year, would have been $10.4 million. Further, if we remove cash interest expense of $12.5 million for the year, then unlever free cash flow, for the year would have been $22.9 million. Turning to our consolidated balance sheet, at the end of the fourth quarter, the company had $37.6 million of cash, cash equivalents, restricted cash, and marketable securities, and total debt of $10 million, compared to total debt, net of cash, of approximately $1.1 billion at the end of 2022. The reduction in debt, was related to our financial restructuring, which was completed in August of 2023, resulting in the elimination of approximately $90 million in annual fixed charges.
As noted in Tom's remarks, our Board has approved a new program, authorizing the company to purchase up to $100 million of shares of our common stock. We plan to opportunistically repurchase shares, at prevailing market prices over the next three years, while also continuing, to invest capital in growing our advertising network, through new innovations, such as programmatic and self-serve. This share repurchase program demonstrates our confidence in the long-term strength of our business and our commitment, to deploying capital in a disciplined manner, to maximize shareholder value through a balanced approach of investment and return of capital to our stockholders. The repurchase program is expected, to be funded by operating cash flow distributions from NCM LLC generated, over the course of the program.
In addition, the repurchase authorization, will be executed at the Board's discretion, and is subject to regulatory limitations. Turning to guidance. Earlier this year, we did a review of our current operating structure and an assessment of our needs going forward. For reference, our SG&A, excluding theater access fees and affiliate costs, was $122.6 million in 2019, compared to this past year, it was $91.8 million, or 25% lower, compared to pre-COVID. In mid-January 2024, we implemented additional cost savings initiatives, which included the consolidation of select business units, and resulted in reductions in headcount. We estimate that these initiatives, will result in over $5 million of net savings in SG&A, for a 5% reduction, compared to 2023.
These savings, combined with the termination of certain network affiliate agreements, will result in a total reduction, of over $10 million in annual operating expenses. With this in mind, for the first quarter of 2024, which is a seasonally slower quarter, we expect revenue to be between $34.5 million and $35.5 million. In addition, we expect adjusted OIBDA for the first quarter of 2024, to be between negative $7.5 million, and negative $6.5 million. While, we will not be giving formal full year 2024 guidance at this time, I would like to take a minute and discuss some of the trends we are seeing. We are expecting some softness in the 2024 film slate, due to the prolonged industry strikes that limited movie releases for the year. I would like to reiterate that we do not see this as a consumer issue.
Interest in cinema is strong, as proven by attendance levels, at compelling theatrical releases over the past year. That said, there are still many films to be excited about, as we look forward to 2024, both sequels and original content, such as Deadpool 3, Gladiator 2, Wicked Part 1, Mickey 17, The Fall Guy, Borderlands, Despicable Me 4, and Mufasa. Looking to 2025, we anticipate the box office, will rebound and set a positive tone for the second half of the decade. With a strong balance sheet and unmatched offerings, NCM is well positioned for the future. The company is positioned, to generate significant free cash flow, due to low capital expenditures and with a historically adjusted OIBDA, to unlever free cash conversion of over 80%. NCM has multiple opportunities, to generate value for its shareholders.
Operator, please open the line for questions.
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