A minute or two to hop on. It takes a little time. Okay. Well, everybody, thank you for joining us today. We are joined very thankfully by Tom Lesinski and Ronnie Ng from National CineMedia. This is one of the companies that we cover here at Wedbush among our movies and entertainment space. They are a cinema advertiser, and we have covered them for quite some time now, several years, and think their core competencies have only increased over time. So first of all, thanks so much for being with us today. We're also joined by Michael Pachter and Scott Devitt on the Wedbush research side.
I think I'm gonna lead the whole meeting, but if anyone has any other questions, feel free to jump in, and those attendees, if you have questions, you can use the Q&A portion, and we will get to those as we go along. So Tom, Ronnie, thanks so much for being with us today.
Thank you for having us, and thank you for being a loyal coverage company of our stocks through the thick and thin, through the good times, the slightly restructured times, and now the good times again. So we appreciate your belief in us, so thank you.
Pleasure. Easy to do. So let's just start off high level. Obviously, you know, you're in the, you know, movies space, the movie theaters, in ad tech, so it's, it's an interesting space to be in, kind of ebbs and flows with the, the box office. But in the ad space, it's certainly, you know, you, you have a different, different aspect perhaps than a lot of the other digital advertisers out there, and you're able to command such premium CPMs in the market. Can you explain to us just, generally, why the company can command such high CPMs, and what sort of attention that you can get in the theater space?
It's a simple question that has a many-pronged answer, so just bear with me a little bit.
Please.
So if you think about the history of the movie business, you know, it's 100 years old, but the cinema part of it's only 25 years old. And over that time, some very clever people, my predecessors, said, "Hey, let's put all these movie theaters on a network," and we have this very captive audience, most importantly, a very young, captive audience, 18 to 34. And when that commercial is on in a big screen in front of them, the attention it commands is literally 3 to 4 times higher than any medium. And that's been consistent since we started.
So a big sort of word being used these days in advertising is attention, and a lot of companies have come out, and we measure our attention, you know, at a very scientific level, using laser scanning of eyeballs of people in theaters, and we compare it to television, digital media, sports, everything. And we've been able to document and really quantify how much our attention is better than traditional television, sports, and everything else. And that's just one part of it. And I think the second part that's kept our CPMs at the highest level...
By the way, only thing higher than us, just for those who haven't been on before, is really NFL, and it's not even necessarily every NFL game, but the Super Bowl, the playoffs, maybe the World Series, maybe the NBA Finals, but pretty much every other form of media, we are more expensive. We've been able to maintain that even during the decline during COVID, and even during the recent strike, we never chose to discount. The second thing we've done is coupled an incredible really investment in data. Over the last three and a half years, we've poured literally millions and millions of dollars into being a database company, that we can prove outcomes for an advertiser. So if they wanna know what someone did after they were saw our spot and try to quantify, "Hey, did they go to a pharmacy?
Did they go to a restaurant? Did they go to a drugstore? Did they go to a fast food chain?" We now have the ability to marry data to that theater audience to an outcome of what's happening, either in awareness building, traffic building. We even did a test recently with a pharmaceutical company, and we proved out that if someone saw an ad in a theater, they actually went out and got a prescription, and they're now a regular advertiser for us. So the attention is a key thing, but also the delivering of the data around the attention makes us really a great choice. The other thing, honestly, is we've been fortunate that our competitors, which used to be the linear television networks, broadcast and cable, have had massive erosion in share.
And some of that has gotten picked up, in fairness, on CTV and on AVOD, but we've taken a much bigger share of that than we used to, and we still get a big chunk of money out of the out-of-home side. So right now, we stand pretty much toe-to-toe with just about any advertiser's solution. And we used to be just a top-of-the-funnel reach vehicle, but now we're also an outcome-based vehicle. So marrying those two, it has been a big part of our recovery story, you know, which started a year ago.
Can you give us some high-level thoughts and whatever details you think are necessary to discuss the premium ad spots that you introduced in 2019, and had to-
... kind of put on hold through the pandemic, of course, and then have reintroduced, more recently?
That's a fair question. And, you know, I started as the CEO in 2019, which actually seems both a short time and a long time ago, depending on what's going on at the moment. But we knew that we had to make sure that advertisers saw a proof that consumers were seeing our ads. So what we did is we shifted our inventory anywhere from six to 10 minutes for most theater chains after the advertised showtime. So if the movie used to start, let's say it started at 7:00 P.M., our ads used to run from 6:40 P.M.- 7:00 P.M. Now, we still have some ads in what's called the pre-show.
But we have six to ten minutes after showtime, and more importantly, we have a special Platinum ad, which runs right before the last two trailers, which in some cases we've sold for $8 million on a national buy to advertisers. So we chose to really be aggressive and future-proof the business, by making that, negotiation, and I would say probably more than, more than 90% of our exhibitors are running that kind of a format today. So that's been a big win for us as well. I think the other thing, honestly, and people just overlook it, is, you know, if you look at other forms of media, like broadcast television, the average age is 63. You know, streaming services are in their forties. You know, our average age is 30, and a lot of it is much younger than that.
A lot of people have come to not believe in social and digital media investing, 'cause they know people are just clicking out, there's a lot of fraud, so we've proven to be really attractive to advertisers trying to reach, you know, the Gen Z and Millennial group, and unlike the network television dinosaurs, which started the same time as the real movie business did, they're aging up, and movies have actually gotten younger, so we're fortunate to be on a platform that's young and obviously very attractive, and the one thing I'll tell you is, you know, the movie business has definitely come back. While there aren't as many movies as there used to be, there have been a lot of record-setting movies in the last nine months.
Like, no one would've predicted, you know, that there would be the biggest animated movie ever this summer. No one would've thought that, you know, a sequel of a sequel of a sequel in Deadpool would do as well as it did. So I think what we're looking at in 2025, you know, as we start talking about the future, and I know that's what everyone looks at on these calls, you know, 2025 looks to be a really, really strong year for the theatrical business. It's been pretty well documented by all the analysts who cover exhibition. We happen to have really good relationships with all the studios and with producers and with all the exhibitors, so we have a really good line of sight on what the movie business looks like in the next 15 months.
I can tell you, like, 2025 will really be the first year without a strike, without COVID, where you're gonna see significant gains on the box office side. You know, some exhibitors have the or some analysts even have that business up 20% in box office next year. So, we're really excited, and we've been through plenty, though, and most importantly, during that restructuring, we cleaned up our balance sheet. You know, we have no net debt anymore. Our free cash flow is great. Our conversion, you know, on EBITDA, is 80% to cash. So it's like we have a really good story, and I think the stock is starting to reflect it. We still think the stock is cheap.
You know, we came out at, you know, obviously at a low price, but, you know, we've done really well in the last twelve months, and every quarter has been good. So we've got a lot of wind at our back, and it's been a lot of hard work that the company's put together behind this, and it wasn't easy, but, we're really happy with the results in the last four quarters.
Absolutely. And if you could talk also about what you're seeing on the advertising side in terms of trends. Obviously, we're not gonna get into the quarter and how that's impacted you, given the earnings are so close. But just, there have been some tough advertising trends over the past couple years, in and out, of course, as it pertains to you, and that hasn't always aligned with the really strong box office, 'cause the box office has also gone in and out due to varying factors. But you know, we do expect a really strong box office in twenty twenty-five. If the ad market is strong in the same year, that could be, you know, hugely positive for you. So if you could give us some backdrop there on the ad side.
Yeah, so when you look at the ad market, you really have to segment it and look at all the different pieces of it. And clearly, you know, the linear and cable networks have been really crushed. In the theater business, ironically, if you just index it against the true attendance, and you look at how we're performing, just in the recent upfront that just is almost finishing, we're doing really well, and I can tell you, we've attracted a lot of new advertisers into the category, which is a really healthy sign. We've diversified our ad mix in terms of all the categories we're in, and we're seeing a lot of healthiness on the cinema side.
What you hear a lot about, 'cause the really big media companies don't like to talk about it, but what's really hurting. The cable businesses are really in tough spot, as are broadcast. I was actually at an event this morning, and I was listening to Brian Roberts of Comcast talk about everything except for the cable business is great. So you know, we've been a fortunate beneficiary, where our business has held up really well, and mostly because we're delivering a young audience. But I can tell you, our CPMs, you know, have been either level or going up, you know, in the last year, and we think that's gonna continue, and the performance metrics around our business have improved, so what our offering...
You know, we've continued to evolve, and candidly, you know, I would hold up sort of our platform and our data around it to just about any platform, and with the maybe exception of Google or Facebook. But we are a really modern media company now, and that resonates with the advertisers, and we also have a huge, you know, share of it. And when you have 70% of it, and you can reach, you know, just about every 18- to 34-year-old in any given weekend, it's a pretty easy story to tell. It was obviously much harder during COVID, and that was a, you know, a 2-year period. But our story, it really is good, and the advertisers believe us, and we've proven out the outcomes.
Before, it was just like, "Hey, cinema's great," but now we can see cinema's great, and it actually works, and we can prove it, and I think that's why, from an industry point of view, things are looking good. The other thing I would say is, in general, the ad business, you know, is not that volatile, but it does move around from a segment point of view. So if you look at the total size of the pie, you know, it's growing whatever, low single digits or mid-single digits, and I think we're growing with that at a minimum, and then we're getting also the benefit of the cinema advertising audience growing. I can't say that for the rest of the ad business, though.
Can you give the audience some color around the performance guarantees that you are offering this year that's incremental to the past?
Yeah, I can't tell you a specific case study by brand, but I'll tell you what we can do. So what brands are asking for through their agencies is, "Tom, we love cinema, but you have to show us that it actually performs." And what you will do is establish a performance guarantee. It'll either be an awareness number, or it'll be a traffic number build-out, or it'll be some metric that we and the brand and the agency agree on. And basically, we say, "Okay, that seems reasonable. We think we can deliver that based on what we know about our audience and the data we have." And we will guarantee them that they will hit that level based on the buy that they make.
And obviously, it has to be a big enough buy, and it has to be you know, it has to be all kind of orderly in, in the way it's negotiated. But that performance guarantee sort of strategy has proven to be really successful, and I can tell you a lot of other companies have copied us, and some just cannot copy us. But I can tell you that the more people hear about it, and the more we tell it in our case study stories to advertisers, the more they go, "Look, I wanna sign up for that.
Let's talk about it, but it does take a marriage between a brand and a company like ours, because we have to use their data, and they have to use our data to marry together to prove that when someone was in a theater that weekend or that month, that there was an outcome that happened, and some of the most successful ones I mentioned to you have been in pharma. We've done really well in auto as well. CPG, you know, which is a very quantitative, analytical group of people, we've won there as well, so we're really happy about being able to promise that and that the performance is really working, and I can tell you, we even compare our performance guarantees to traditional television, and we're far better.
It's just one more way of us stealing market share from the pie.
I was gonna ask you about the mix shift of advertisers. I've certainly seen more pharma advertisements in cinemas in the last couple of years than I did, you know, a handful of years ago.
Yeah, there was none. There was truly none a year and a half ago, and we did a test with an advertiser. Mostly it was never there because the typical pharma budgets are targeting much older people. But now there's a whole market for drugs for younger people, and whether it's for any kind of issue. So now that there's both a consumer and an advertising budget, we can attract them, but you still have to prove it out. So their basic model is prove to somebody that they saw the ad, that they got a prescription, or that they went to their doctor, or both. So all of that's really important. And we can do that now with pharma. And also, I can tell you, we've been opening up other categories. Travel has gotten much bigger for us.
Automotive has always been big, but it's getting bigger. Even the government, you know... I can tell you a crazy thing, you know, one of our big attractions in the local business is the lottery. Every state lottery pretty much advertises in cinema. It's very effective for them. So, good thing is we've really taken a huge, sort of swing at other industries without really eroding our bases in others. I mean, still, the entertainment and telecom sector is still the biggest, but we're really happy with how we've diversified the business. It's really important, especially if there's any downturns in certain economies.
And has generative AI impacted your business yet, and if so, to what extent?
I would say I wouldn't say we're a leader in generative AI, and that would certainly be an overpromise. We are using AI and have been for over a year, and the basic case study is, we have a lot of local advertisers that cannot afford to create their own ad inventory or their own commercial. So we will use. We used to do it in-house. We had a whole team of people. Now we're using AI to get to almost 80% of a finished commercial, and then we finish the last 20% of it, which is A, making it more interesting for the advertisers, and B, it's creating a real dialogue with advertisers, and more importantly, it's saving a lot of cost for us.
So I think, you know, we have a whole team here looking at AI, like every company does. The initial use case for us is on the advertising side in terms of building out creative. You know, we used to have probably a team of fifty people doing this. And now it's a much smaller team, and we're able to do the same results for it. And I'm sure there'll be other applications going forward. Everyone wants to have AI in their business plan, so we're certainly not ignoring it either.
How has the model changed? How has the business changed in terms of the ownership after the restructuring? Can you talk about that a little bit?
The ownership, yeah.
Oh, yeah, Ronnie can do that one.
Yeah.
I thought you said ownership for a minute. I was thinking, "Oh, my God-
Right
... what did we do?
Prior to the restructuring, NCM was actually owned about 50% was held publicly, and the other 50% was held by two of our exhibitors partners, which was Cinemark and Regal. Post restructuring, NCMI, the publicly traded entity, actually owns 100% of the operating company. It's a very cleaned-up structure where the governance is also fully aligned with the public shareholders, versus before the board consisted of you know, our exhibitor or founding partners in Cinemark and Regal. It is much more shareholder-friendly now post-restructure.
Importantly to the board, you know, is that there used to be a, you know, a board that was controlled basically by the founding members. There are no exhibitors on the board anymore. It's a whole new board. It's mostly marketing, advertising, finance people, like a typical board. So we can really work and do what's best for the shareholders, not necessarily what's just best for some other constituency, and I think having been on this board for a long time, it's really fantastic, you know, what we're accomplishing, and the kind of people we've attracted to the board is impressive, and it's already paying off.
It was a much different board, as you know, Alicia, you know, historically, and it was much more sort of, I would say, focused on what was best for a certain group, not necessarily what was best for everybody. And I think some of the things we've been doing, whether it's share buyback, whether it's just, you know, hitting our numbers every quarter and outperforming, all of that is part of this whole change of the company and the culture of the company. The one thing I'll remind some of the investors about who are on the phone is when pre-COVID, just as a good example, we had 628 people at National CineMedia. We have less than 300 today. And, you know, we are functioning actually really well.
It doesn't mean we're not gonna add some people, particularly on the sales side, but we've also learned to run the company much more efficiently, than we did before. So the one ironic benefit of all this, and then Ronnie spearheaded a lot of this, was, you know, we've learned to become more efficient. And I think it's paying off, and it helps, and it makes it easier to manage, actually, less people. So, that's an interesting storyline for our company as well.
Indeed. Yeah, a lot of different interesting aspects here to dig into. I do wanna also ask if any of the recent advancements in programmatic buying for cinema ads has influenced that ad targeting campaign performance, or any of the upfront discussions this year?
Yeah, so programmatic has been in something we've invested in and committed to. It's far and away the most significant infrastructure focus that I personally have, along with my senior people. We started doing programmatic at the beginning of the year. It's paid off right away. We've attracted new advertisers. We've attracted literally brands that had never been in the... ever on our platform before, and there is a separate budget that brands have in programmatic. So we are doing everything we can to roll out to be on as many programmatic platforms as we can. We know it's gonna become a material part of the business soon, and we have proof of that. It's much harder doing programmatic for a theater group like us because every different theater has different software.
They have an individual projection booth with a hard drive in it, and coordinating that and doing it at scale is much more difficult than connected TV or traditional digital players. But we have the right partners in place. We have a really good team on it. And I think, you know, within six months, maybe a year, we'll be really, really broadly deployed in all the programmatic platforms. But it's a great opportunity for us, 'cause I can tell you, there is unsold inventory. We can't possibly reach everybody. But I can tell you also, on a local basis, programmatic and self-serve is gonna be very important. You know, we used to have over a hundred local salespeople. You know, we probably have a third of that today.
And a lot of that delta is gonna be taken up by programmatic and self-serve, and we're already seeing a lot of local people adopting to that. So it's important for us. I can't tell you, I literally talk about programmatic with my team every day. So it's good that you mentioned that. They'll be happy to hear it-
Yeah
... that the analysts are paying attention, too.
Yeah, and that actually leads into my next question. I wanted to hear you talk some more about where the ad dollars are going, how they're shifting from cable to connected TV, to cinema, to FAST channels, more and more coming out all the time, and more ad dollars going that way. And balance that with the shift of, you know, ad dollars going, you know, to the upfront, to the new fronts, and to, you know, just different scatter market, you know, different bookings through the scatter market-
So let me unpack that a little bit first.
Yeah.
Let me first talk about national and local. Historically, would you say local's been about 20%?
Yeah, it's been about 20% of the company.
I think ultimately it will get back to that level, especially as we add programmatic, and then we add some more local salespeople. It's a very important part of the business. You know, pre-COVID, our local business was, you know, probably $100 million, you know? So there's a business out there that we're gonna reconstitute. As it relates to the upfront and the scatter business, historically, we've been, what? 70%, would you say, or-
Anywhere... there's anywhere between sixty to seventy.
Yeah, in the upfront, and then the rest has been in scatter. So this is a funny sort of aspect of the advertising business. A lot of people wanna just have the guaranteed money in the upfront. Makes you sleep well at night, you know. In the old days, networks would try to have 80% or 90% booked, and then everyone would do nothing for, you know, 12 months. The problem with that strategy, though, is that you're typically discounting on the upfront and you're not getting the opportunity to take advantage of a scatter market. So when scatter right now, which is relatively healthy, turns around, you don't have the inventory to use it. So we've actually been, you know, searching for the exact right mix, but our scatter business has been very good lately.
It doesn't make you sleep as well at night when you've got to make, you know, every week and every month because you don't have it already booked, but you're booking it at higher CPMs with less discounts. And you typically have an advertiser who I won't say is desperate, but is much more inclined to not push back on pricing. So that's that part of the story. Now, the shift mix is interesting. We can't track where every dollar comes from as it relates to CTV or cable or broadcast, or even digital. We are bought out of almost all those buckets, ironically. Thankfully, those people consider us premium video, and we're a more premium video than really what you would call the NewFronts buyers buying. Traditional premium video used to really be network TV in prime time and sports.
So we're bought out of that bucket. We're also bought still out of cable, but we're also bought out of what I would call the AVOD world, which, you know, CTV is a huge segment of. And to some degree, we're not really copping out to the FAST channels, guys, 'cause, you know, that tends to be lower-priced inventory. But we've been able to position our product across all of it. And also, we're still being bought, in some cases, from outdoor budgets, and including digital out-of-home, which is a growth category. So we have you know, if we had six feet, we have six feet into different buckets, so it allows us to take advantage of all the media money that's out there.
By the way, in the early days, we were bought only out of out-of-home, and it took us a long time to get into television, and now we're in AVOD, as well as that, as well as digital out-of-home. So, we're always evolving on that front.
As a public company, I'd be remiss if I didn't ask you to detail your balance sheet, priority strategies, and capital allocation priorities over the next one to five years.
Yeah. So, coming out of restructuring August last year, we have essentially no debt on the balance sheet. We're sitting with anywhere between $50-$60 million of cash on the balance sheet, depending on the quarter. It kind of fluctuates a little bit. And earlier this year, back in March, we actually announced a $100 million share repurchase program for over the next three years. We've actually thus far, year to date, utilized a little bit over $10 million out of that. And we're gonna continue to be opportunistic deploying that share repurchase. Obviously, kind of, our share price has done well, as Tom noted earlier, but we still believe that there's value there.
Absolutely. Well-
Yeah, and one question I get-
Go for it.
... not just from every analyst, from every investor, is: what are you gonna do with the money? You know, and we're in a fortunate position, whereas a year ago, the question was: where is the money, and do you have any money? And now, you know, we're really feeling pretty good about our cash position, and we're evaluating, you know, plenty of opportunities. You know, least of that, which was, of course, buying shares back. And we're gonna, you know, we're not in a rush to do anything crazy or anything drastic. What we wanna do is make sure what we do is attractive to shareholders, and then, more importantly, has a good short, medium, and long-term horizon, for investors.
Honestly, you know, I've talked to, I'm not exaggerating, probably 200 investors just in the last six months directly, and everyone has an opinion, which is great. Many of them are just quite happy with riding the recovery, honestly, 'cause they see this next, you know, year and a half, 2 years of theatrical growth, but we have to make sure that we're attractive to all kinds of investors. Whether you're a dividend investor or whether you're a growth investor or whatever, we wanna make sure that we're looking at every option that's out there, so we've been spending time looking at alternatives on that.
Excellent. Well, we have unfortunately run out of time, but we really thank you so much for your time today. It was very informative, and it's certainly an interesting company to take a look at.
Thank you very much. We appreciate your support.
Thank you, Alicia.
Thank you.
Pleasure-
Sure
... as always.
Bye-bye. Bye, Michael.