AMC Entertainment Holdings, Inc. (AMC) Earnings Call Transcript & Summary

Very fortunate to have Craig Ramsey, CFO of AMC. We'd love to have as many questions as you guys have appetite to ask. If you do have a question, just make sure you hit the button so it goes through the webcast. Our disclosures are in the back of the room. And Craig, thank you for joining us.

Well, it's my pleasure. And just for those in the room and for those that are listening in that may care that our new guy, Sean Goodman, is here with me, will assume the CFO responsibilities in -- at the end of February. And so we're here introducing him. And I -- a couple of things I've learned in going through this succession process. One, my shoes aren't nearly that big. Not going to be hard to fill my shoes; and two, Sean is a very capable guy, and we won't skip a beat from the CFO perspective of our company because he's going to be a tremendous addition to our management team. So with that, back to you.

All right. All right. So maybe I would like to just start with a -- maybe a backward-looking question in terms of 2019. At least the shareholders of AMC didn't do that well in '19 owning your stock, but what would you say went well in '19 from a corporate perspective? What didn't go as well as you sort of thought?

Okay. How much time do we have?

No, no. Take your time.

2019, looking back, there certainly were some positives and clearly, there are some issues that are out there. On the positive side, look, the box office, well, we could say was a disappointment. We maybe got a little ahead of ourselves. We were coming off of 2018, really strong year, and we had some expectations that we didn't quite meet in 2019. But it's the third highest box office on record. And so it's good from that perspective. For us, we accomplished a couple of things. We've been an outperformer as compared to the other participants. And if you went back historically, that had not always been part of our story, but it's become an important part of our story for several reasons that I'll talk about here. But we have consistently, through the year, outperformed, and I think it's based upon some things we have done strategically and tactically that should -- we should see that continuing in the future. So that's been a real positive. One part of that story has been the introduction of A-List, our subscription program. And maybe it was last year when we were talking about this disruptor that came into our industry. I can't remember their name -- of that company, but that introduced subscription to our industry and it was going to totally wreak havoc with exhibitors. And I don't know, they didn't actually work out so well. We were more patient, we were thoughtful about it, and we introduced a subscription program to our moviegoers that was sustainable. It was structured properly. It was good value for them. It's good for our industry partners on the studio side because we're driving attendance and moviegoing. And as we look back, we actually did -- we introduced that in 2018. We've now lapped the year of ramp-up. And there's always some drag on operating results when you launch a significant program. That's behind us. The program, we are more heavily engaged digitally and with our guests than we ever have been. A-List is a big part of that. It's structured to appeal to heavy moviegoers, heavy users of the moviegoing experience. And it is -- we're about a year ahead of schedule on incrementality. We thought it would be a drag. It's outperformed, and I think it will actually contribute to results accretively in 2019 and even more so into 2020.

When you say results, you mean EBITDA? Is that what you mean?

Financial results. EBITDA loaded for full operating expenses, incremental and everything. So we're a year ahead of schedule. And I think it's because the bring-along and the food and beverage has probably exceeded our expectations, and the frequency metric is kind of in line with expectation. The program has been a great success. And I think of it as the beginning. It's not an end. There are different structures or different features that we can add and grow the membership even more than the 900,000, which is the last count that we disclosed, the 900,000 moviegoers that currently participate in the program. I think it has long-term benefits for our company.

And we just -- I just want to clarify, just for those that are less -- following you less closely. Bring-along is I have got a subscription to A-List, but I bring a friend along and that buys a full price ticket. Is that what you mean by that?

Moviegoing is not a solitary experience. Generally speaking, you usually bring someone and they are full priced. And hopefully, they'll eat food and beverage as well. Now it's interesting that since we're going down that path, we are hearing, where can this program go? We are hearing people say, "Well, I love A-List, I love the single membership, how about a family plan?" So you're already seeing some interest build in different layers, different pricing and more membership around the basic A-List program that we just launched, so...

And when you said frequency was in line with your expectations, is that something around 2, 3 or something like that? 2.3 visits a month?

I think 2.5 to 3 is probably the relevant range. It is a little bit dependent upon -- in a quarter, dependent upon the film slate. On a more popular -- a more active moviegoing part of the year, you might see it bump up to 2.6 and then it might slip to 2.4 in a slower period. But it's kind of centering around that 2.5x, which is an important ingredient to profitability but so is the bring-along, and obviously, the food and beverage bit.

Okay, great.

So where were we? That was -- I'm still on the good things that happened, right?

That's right. You said box office was third highest on record, A-List went pretty well.

I think the other part that we benefited from is our international business is starting to gain traction. And that's both because of some of the capital investments we've made, some of the initiatives we have deployed. We were interested in acquiring Odeon because we saw an opportunity to upgrade their circuit both from sight and sound perspective, IMAX, Dolby. And also seating, not all of them, but certain theaters, we could remodel and upgrade the experience. And importantly, the food and beverage experience, we thought we saw the guest underserved, and that, we're starting to really see traction in the deployment of those initiatives. And at the same time, we saw a little different -- a little -- better balance, maybe one way to describe it, more family product in the market in 2019. And that actually played into the international markets. They tend to play family product a little stronger, a little better, and that certainly had some positive effects on the results in 2019 on the international side. Early in the year, in April, we had an investor meeting and we set forth some objectives because of some of the initiatives and spend on capital deployment, improving theaters and our acquisitions. Our leverage is higher than we'd like it to be. So we set some targets aimed at growing our business, increasing our EBITDA and generating free cash flow and lowering our CapEx as a part of that, not only because we needed to generate free cash flow, but we were at the end of this CapEx cycle around remodeling. We announced it, and we said, "Look, we thought we'd be at $250 million to $300 million of capital spend in a couple or 3 years." We're kind of there already. The last guidance we had for capital spend in 2019 was about $411 million net Capex. That's down pretty dramatically, $150 million or so. We think the relevant range for 2020 will be $250 million to $300 million. So we've hit our target on capital deployment probably a year ahead of schedule, and I think that will have positive ramifications on our free cash flow delivery. So there's a lot of good that has come out of the year. We've taken a lot of steps forward, but there's clearly some other issues out there. And I think that one is around this content providers becoming streamers, and that as that gathers momentum on the streaming side, that it will result in less moviegoing attendance. People will stay home and watch content through a streaming platform and not leave the home or at least more content will be moved to streaming. That's out there. That's accentuated probably a little bit because we look forward to the 2020 box office. And I could make my prediction, but there has been enough written on it that everybody is saying, "Look, it's just not going to be as good a year." Well, we'll see. Clearly, it doesn't look like, just in terms of the titles, that it's going to be quite as strong. And I think that's kind of fit into this whole streaming dialogue as well, and it's kind of built some momentum. And it's had a negative overhang on our equity trading in conjunction with our leverage profile. It's had an impact, to your point, not being a particularly good year for our shareholders. And we have our own view of that, that there have been -- over the years, there have been a lot of threats to our window, our theatrical window. PVOD is one we went through. It's different than streaming, but it's similar in many respects. We think the evidence suggests that moviegoers are streamers and streamers are moviegoers, and they like to consume content. And at some point in time, they are going to leave the home to consume content or go to the restroom or whatever, but they are going to go out of their home. And all that we're doing, whether it be the marketing platforms, the sight and sound enhancements, the better seating, the better food and beverage, all of that should make the moviegoing experience better and make it relevant. So when they do decide to leave the home, they'll pick moviegoing and that we'll stay in this game of showing film content and the people that make movies, the studios and other content providers, will view this window as a way to brand their product, a way to differentiate their product, a way to distinguish it in the constant scroll of titles on screen in the smaller home environment, it's a way to differentiate that product and that moviegoing, theatrical moviegoing will be a long-term, viable business for years to come. And I -- that's about it. There's -- we've done some things to move it forward, and I think there's still some issues out there that are an overhang that time will tell. And at the end of the day, I think will prove to be in our favor, actually.

So you touched on your leverage being a little bit higher than you originally imagined and some of the changes you've made to your CapEx to generate free cash. Would you say that this tactical disposition of assets is part of the portfolio of options you have to get your leverage down even faster? Or you think this is more of just an organic sort of deleveraging process as EBITDA grows and you use your cash flow to pay off debt?

I think everything's on the table. I think there's different priorities assigned to the different options. And first and foremost, it's to delever organically, to borrow your term. We've seen this before. We have seen our industry go through capital deployment cycles where we spend heavily, improve our facilities and then we -- after that, after those assets are in place, we then can kind of live off of that and monetize for years after that. That's kind of where we are. And so we do believe that it's the natural end of the capital deployment cycle. We've got good assets in serving our guests, and it's time to monetize those investments and that the priority, let's bring CapEx down to a normalized level. Not to starve the business at all, but to reduce it to where it normally should be, still some growth, taking care of all the maintenance, but that, that drives more free cash flow. We'd also like to see EBITDA grow to help delever as well. That's going to be film-dependent. We've done some things on that respect. We had a $50 million profit improvement plan. We rightsized some headcount in anticipation of plan for the worst and hope for the best. If we have a tough 2020, we've taken some action lowering CapEx and rightsizing our organization through some headcount reduction and cost-cutting to position us to do well, even if we do have a downturn. So back to your point, back to your question, organically is the preference. Look, today, you look out there, there are buyers of theatrical assets that are willing to pay high multiples, and so, that would have to be consideration for us going forward. It may not be Plan A, but it may be -- there will be opportunities. There may be some nonstrategic parts of our circuit that would be meaningful to someone else that would step up and put together a very accretive deal. We'd have to look at that. And that the intent of doing that would be to delever our balance sheet.

Okay. When you sort of think about the rightsizing of the headcount and the cost-cutting efforts that you undertook in 2019, how much sort of insurance did you buy as it relates to the box? In other words, if an investor is trying to sort of assess the tradeoff, is it like you've sort of did not get -- you've sort of offset a 2% decline in the box or 1% decline in the box or less? Like, how would you frame that? Or is that not possible?

Well, I guess, the math would be that we have a 24%, 25% market share. That's the box office. It's about 2/3 of our revenue. You could take the margin against that. And so I -- what does $50 million of EBITDA save us in terms of -- it's probably a couple hundred million of box office protection, or maybe $300 million.

Okay. All right. Great.

And then the other point I'd make, too, is as people think about 2020 in the industry, we do still believe there will be an outperformance on our part that we'll do better than everyone else. Hopefully, everybody has a good year, but if -- in a downside scenario, we've put some things in place and are managing some marketing programs that are really driving some business to our theaters, and I think that will continue next year.

This is going to sound like a strange question, but one of the things that always strikes me when I look at your results in the quarter, relative to the industry, is the type of movies that came out in the quarter can actually have a profound impact on whether or not AMC outperforms or underperforms in a quarter. I always think of -- I think -- what was that movie around the Libya attack, 13 Hours, right? It was a big driver, and it didn't do so well in your markets because you tend to skew more urban. Where if you have movies that are sort of...

Rural?

Yes. In the over-indexed world, like if you look at the slate, do they look to you, as someone who's done this for a while...

There are, absolutely. And there's regions of the country that will play some product better than others. We've mitigated that recently when we acquired Carmike, largely a rural market presence, and we took some volatility out of our box office share through that acquisition. The other thing I would point you to or want you to think about on that respect about it, A-List is -- takes volatility out of our admissions revenue as well. I mean we've got 900,000 moviegoers that are paying us a monthly fee, and that stabilizes the numbers a little bit and makes us less susceptible to box office fluctuations. It helps. It's all additive, I guess. But I think on your point about genre sensitivities, we probably neutralize some of that with our Carmike acquisition.

And maybe my notes are wrong, but years ago, I had written down sort of $150 million maintenance Capex number.

No, that's right.

That still seems right to you?

That seems right.

And so in the context of your $250 million to $300 million, that's like maintenance plus something. We're not sort of bare bones. That's your point.

Yes. No, I would also want you folks to think about we're an important tenant for the landlord community, and we get about $100 million of capital from landlords. So you could think about, if you pick the lower number, the $250 million -- or pick the $300 million. If you pick the $300 million and say, look, we get $100 million, we really have $400 million of CapEx to spend. $150 million of it goes to maintenance. So you've got $250 million of discretionary capital to spend that you have the ability to manage over time, depending upon the business conditions you face in the box office.

Understood. So your dividend yield now has gotten to a point where, when I sort of look at it, it's usually the buy side's way of saying they expect a cut, right? Last time I checked your div yield, it's maybe 10%, something like that. I mean is that a reasonable expectation that you guys are going to sort of reexamine the dividend based on the 2020 outlook and where things sort of seem to be shaking out in the business? Or do you think the market is sort of misdiagnosing the risk of the dividend?

Well, look, I think that you would look at the dividend as a capital allocation piece of that whole question. And again, a part of your cash generation through the business. Our first priority was to deal with CapEx and take care of the bigger spend, normalizing it. The dividend question is on the table. It's under consideration, but it is a Board decision, and there's been enough -- no decision to this point in time. We paid the dividend for 23 consecutive quarters since our IPO and -- but it is one that I'm sure will be examined as we go forward. But at this point in time, there are no decision.

Okay. What about the -- I think, years ago, the window was maybe, I don't know, 130 days, something like that.

You're not that old, are you?

Yes, I think, I mean, maybe I was looking back at historical data.

But that's probably right, yes.

So but we're down to sort of -- whether you're doing -- looking -- depending on which window you're looking at, I think it's 70 to 80 days, something like that in that range. For that quantum of erosion in window, there hasn't been that much erosion in attendance or the box office. There's a little bit there. But if you were to ask me -- like how many years ago do you think we're at 130 days, a decade ago?

Probably 10 years ago.

Okay, okay. So if you were to ask me, "Okay, 10 years ago, the window is going to go from 130 days to 70, what's going to happen to the industry?" I would say, "Oh my gosh, that's a nightmare." And the trends actually haven't been that bad. And when I come out at the other way and I look at when do the box office receipts come in once a movie is released, it's a huge amount in that opening week and a huge amount in the second week and a huge amount -- and by the time you get to...

Who's put you up to this question?

Well, by the time you go out to 70 days or 80 days, you're at the asymptote part of the curve, right?

Well, it depends on the film.

Okay.

Clearly, there are movies that play well beyond 73 days. But to your point is a good one, that there are a number of movies that, yes, that demand is sated early, in weeks.

Right. And so do you think as this windowing goes on, if you had to guess over the next 10 years -- and this is one of those examples you won't have to answer.

I will not have to answer.

I will not hold you accountable. Do you think it ends up splitting where some studios just say, "You know what, we're just not going to use the exhibitor channel. We're just going to go direct-to-consumer." And other studios, say, "No, we're going to continue to play the old rules." Or is it going to be more like we've seen in the past where, yes, there's some variance by studio, but generally, everyone's sort of marching along the same -- to the same drummer and squeezing the window by a day or 2? Does that make sense? Like do you think it -- okay.

Yes. Well, to your point, the window has been under pressure for a long time. And we've seen it slowly erode. And I think that there's an argument that you made that movies play off sooner, but it's kind of about consumer expectations too. If an absolute 45-day reduction in the window -- going to 45 days, just -- that's it, that's the new window, learn to live with it. That's going to be -- that would be very difficult if we're not going to be willing to do that.

So a discontinuity, you're saying, from 70 to 45 in one fell swoop?

But I would say that there are many other touch points with the studios, with the content providers around our relationship. It's not just the length of the window, it's what do we share on the tickets. How do we support the branding of that content to our 22 million household membership loyalty program? How do we trailer those movies in the preshow as coming attractions? There's a lot to that relationship. And we focus a lot -- or the press or people had asked questions at these conferences, focus a lot about that window, that number of days, and there's a lot more to the relationship. And we just can't -- as an industry, and I think, certainly, as a company, we just don't see drop into 45 days. And that's it. It has to be a package deal. It has to make economic sense. We would need to be compensated. And frankly, if there were some way to shorten the window around smaller releases, but not around larger -- to where it was not predictable by the consumer, there was confusion around windowing, and they couldn't say, "Oh, this movie is coming in this many days," that it was unclear, there -- that could benefit some smaller titles that are very important to us because we play a lot of movies. Tent-pole movies are very important to us. But my point is, and I -- to us, is we can't be economically disadvantaged. That's an important asset for us just to have the room to play titles, even some of which extend beyond that, but also the consumer expectation. And we would need to be compensated before we're going to go down that path.

Okay. Silver Lake. So about 2 years ago, you entered into an agreement with them. And I think that there was a provision in there, 2-year anniversary that says, if your equity was below $15.80, the conversion reset. And I just couldn't remember what happened on that reset provision. If your equity is indeed below $15.79 in September this year, what happens?

Okay. There is some complexity around the provision. But there is a reset provision, and it was at the 2-year mark, which is September of 2020. And basically, there's a 10-day VWAP calculation of the share price. I think it's the 26th of September. There's a date that you measure from. And if the price is -- I think it's $15.75 to $13.89 or something like that, there's that -- the convert price would reset and the dilution created by that reset in terms of number of additional shares that would accrue to Silver Lake on a conversion, the first 5.7 million or the $15.75 to $13.89, that would be funded by Wanda. They suffer the first dilution. Then if the price is -- that if there's -- if it's below the $13.89 -- it's $11.79, I think. If that is the case, then that dilution, that would occur if the -- on conversion, there's about 4.67 million shares that's funded, that's a public dilution. That's -- the company would issue those shares. Wanda is on the hook for the first 5.7 million, then the public for the balance. But there's still a -- and then there's a floor. The $11.88 is really the result of a floor that says, look, Silver Lake cannot own more than 30% of the -- if they were to dilute, they couldn't own more than 30% of the stock. And that's why you have a floor on the convert at $11.89. Therein then, there is still a 20% premium on the convert price. Even after you do all that math and figure out the number of shares, the convert price is still set at a 20% premium to the share price.

Got it.

So a bit of complication.

No, I understand. That was very clear. Any questions from the audience? What about consolidation? We've seen some consolidation when Cineworld acquired Regal a couple of years ago. And then they acquired Cineplex. You did a bunch of acquisitions. Are we sort of done? And what do you think is driving all this M&A? Is it as simple as the exhibitors are looking for more scale to gain leverage over the studios within the context of this windowing debate or is it more nuanced than that?

Well, there's consolidation on both sides of the camera. Certainly, the studio world is consolidating, and it's a global business. And on our side of the camera, we're seeing the same thing. And we're global. Cineworld is global. And so I think it's good that we're -- I don't know if we're matching it, but there is clearly scale to this business, your point about leverage, with the studios. There's more scale than our relationship with that particular vendor. There's scale in strategic initiatives. And a good example of that is at Odeon. We acquired Odeon, we saw an opportunity to deploy our reseating initiatives, our food and beverage initiatives, our sight and sound initiatives. That, to me, is scale. That's taking something that's proven here domestically to an international circuit and deploying it with great success. And we are having great success with those initiatives internationally. So there's that scale opportunity. There is some procurement scale. Look, the leverage -- I think that I would rather look at this exhibitor-studio relationship as more alignment because I think that we are a better marketing partner than we've ever been. And it's our loyalty programs, it's our A-List, it's the information we have on theatrical moviegoers. And I think that's important to us that we operate our business and try to motivate people to come to our theaters more often. I think it's also important to our content providers that want to use those assets to market directly to buyers, to known users of their product. And I think the more we do that -- there's scale to that. We can do that domestically and we can also carry out the same type of efficiencies on a global basis. So it's not just leverage in negotiating how we're going to settle up on a film, it's all about -- it's kind of pervasive through all the areas that we conduct our business that we're trying to be a better partner. And part of that is getting -- growing globally with -- as the studios expand their reach as well.

Okay. So there was a time when, I think, before the DOJ got involved where you owned a bunch of shares of National CineMedia, right, which I don't think you own now?

A nominal amount.

Okay. National, then you guys started and the rest of the industry. Or did you reserve ticketing, right? And it sort of put some pressure on National CineMedia because the theory was people would show up later or closer to showtime, and so, therefore, they wouldn't necessarily see the ads. Then National CineMedia turned around and started to introduce ads that were sort of after the advertised showtime. And I think some other exhibitors have sort of agreed to that new inventory, and you guys haven't, I don't think.

That's right, we have not.

Okay. Is that just a philosophical sort of view that we don't want to upset our consumers that they show up for showtime at 7:00 and all of a sudden, they're bombarded with 20 minutes of previews and ads? Or is it more just a tactical thing of like we're still hammering out discussions with National CineMedia?

No, I think there's even something bigger involved here. That -- back to being a partner with the studios, with the content providers, it's about that. That's trailer time. That's advertising. That's the products we're going to sell next week, in 2 weeks, in 3 weeks. That's what we're going to sell. And do we want to advertise toothpaste? That would be a little facetious. But what do we want to advertise? I think we want to advertise the products we're going to sell. That's important to us. I think that's also important to the content providers that people are in their seats, they're there to watch a movie and they see the best ads for the upcoming slate. That's pretty valuable time. And that's really probably at the heart of why we were motivated to not run more ads.

Okay, that's very helpful. Any questions for Craig? All right. Well, thank you. You did a masterful job in answering all my difficult questions. I appreciate that. And congratulations...

Well, we'll see. And maybe I'll come back next year as just an audience.

Yes, please do. You're always welcome. You're always welcome.

I appreciate the time, Jason.

Yes, absolutely. Thank you very much. Thank you.