IMAX Corporation (IMAX) Earnings Call Transcript & Summary

Good afternoon. This is Meghan Durkin. I cover U.S. theaters here at Crédit Suisse. We're happy to have with us Richard Gelfond, the CEO; and Patrick McClymont, CFO of IMAX Corporation. Thank you so much for being here, guys. So I'm going to just jump right into it. We only have 25 or 30 minutes for this session.

So Rich, the world is opening up. The market has been excited about this recovery for a few weeks. We're starting to hear about reopenings for the New York -- the U.S. theaters. Can you give us an update on where you stand on opening your screens around the world and maybe start with China?

So China still hasn't set a date, Meghan. We've heard rumors that it'll be late June, early July. But they -- and our people are dealing with the people in China about opening protocols, but the date is supposed to be set in the next week or 2. In the rest of the world, it varies. So parts of Asia are already open now. Japan, Korea, Taiwan are open. Middle East is open. I think parts of South America will be later than the rest. But I think most of the world, including the U.S., will open in early July, and that coincides with -- late in July is when the first major film releases should happen.

Okay. So what are the steps that need to be taken in order to get these screens open in the U.S.? What is the industry working on for the opening? What are the processes that still have to be done?

So it depends a lot on local regulation. And for now, a lot of the U.S. is -- there are planned openings. But in California, it was left to the local municipalities. So that has to be worked through. And New York is the other major market that still hasn't given guidance on when they're going to allow openings. But a lot of the protocols have already been put in place. So for example, they'll open with some limited capacity. So it will be every other seat or every other row or checkerboard in some way. And the likely limitations will be 25% or 50% and then they'll open more and more over time. I think in most places, you'll see the employees at the theaters wearing masks. I think it'll vary whether food is going to be allowed for sale or not. And then it'll depend on how it goes. It's actually a little bit curious, though, because when you get down to the basics of opening theaters, they actually should be, in theory, a lot safer than places like restaurants or sports stadiums because in those other environments, people are talking, people are clapping, there are people going by. In a theater, you kind of go into a row in a dark place. You're faced ahead. You sit there. You look at a screen. You leave. So the openings are rather confusing what happens where. But when you take a step back, the theater seems to be a safer environment than a lot of other places that are opening.

Got it. And the capacity restrictions have obviously been a huge topic for investors. We get the question a lot. So can you talk about what you see as sellouts typically on your screens? And maybe if you could touch on what you're seeing so far in those markets where you are open?

Yes. So the markets we are open, it's varying from market to market. It's not new movies, it's re-releases, library movies or films that haven't been released in those territories. And with an asterisk, it's been surprisingly robust. Any asterisk is subject to capacity limitations. So I think it's in Denmark or somewhere in Scandinavia they re-released a lot of Chris Nolan's movies and we had sell-outs every day, but they were sell-outs in the context of a limited capacity. I think in Korea, we had Avengers: Endgame and Avengers: Infinity Wars, and they did very well. But again, it's in the context of very limited capacity. I think -- we don't think in the very early going that people should be looking at this and expecting huge box office numbers. For us, for IMAX, it's about getting opened. As you know, we have a very strong balance sheet. We have over a 2-year runway to get open. So for us, it's about opening right and making sure people are healthy that go there and, equally important, that they feel safe. And I'm a little bit concerned that people are very focused on what's the opening weekend when you open. I think investors really have to get that out of their minds. It's not going to be -- it's not going to challenge Avengers: Endgame for the biggest opening of all time. That's just not happening. On the other hand, traditional cinema for a good year is typically at 20% to 25% of capacity. IMAX, which had a record year just a few months ago that ended, our worldwide capacity was at 10%. So capacity constraints aren't as big a negative as it might be in a restaurant or they might be in a Broadway theater. And the reason is that these boxes are built for big Friday nights and big Saturday nights. So the key is can you spread it out during the week. And I think that's naturally going to happen before this vaccine because I think not everybody is going to want to run and go on Saturday night. I think people a little older, my contemporaries, are going to say, let's go Thursday afternoon because we're working staggered hours anyway, or let's go Wednesday night. So -- and then we're going to try and market to stagger the hours. So how do we move people from Saturday nights? Is it discounts? Is it promotions? What is it? So I think capacity is definitely an issue to think about it, but you can't think about it like you would in other businesses because this particular business is built for Friday, Saturday nights. So it's really -- there's enough capacity there. The question which I don't think any of us really know the answer to is how does it spread out.

Can you talk a little bit about what the sellouts are on the weekends versus the weekdays? Because if you're averaging 10% for all last year, that's highest on the Friday, Saturday night, right?

Yes. I don't know what that answer is, but I can give you an idea in an indirect way, which is that a movie that we did 150 -- that opened to $150 million, like Captain Marvel, for example, that kind of movie, that was 50% utilization for IMAX. So in fact, that's a pretty big movie. So we could accommodate reduced capacity. Again, it vary by city to city, but it gives you a general idea. For a film like Avengers: Endgame, which did much more than that, was the biggest movie of all time, that's when you start to see capacity utilizations affect you. So if you ask my guess, I think it will dampen the potential a little bit, but I don't think it'll dampen the potential as much as people might think in the abstract. But again, to repeat what I said before, I think limited capacity will exist for a while. And for IMAX, where we have a very long-term staying power, the issues are really how to reinforce the brand, how to reinforce the moviegoing experience. And then as capacity opens, how to get into the bigger numbers.

Okay. Well, let's move to film slate, which has been a huge topic. Tenet shifted. Now Mulan is the first big movie that's slated for July 24. So now the initial product is expected to be library content. What movies will you be showing initially? And then what do you expect will happen with Mulan and with Tenet at the end of July? Do you think they'll stay there? What are the puts and takes there?

So I -- Warner Bros, when they moved Mulan from the 17th to the 31st of July, announced that they're rereleasing Inception on the 17th, and I think that will do some business. And as you kind of framed in your question, I think there'll be library titles also at that time, and there's a Russell Crowe movie coming out in early July. So there will be some kind of product that gets people used to going back to the movies. Mulan is the first new blockbuster schedule, which is on the 24th of July right now, and then a week later is Tenet. You never know until the release date is kind of the bottom line because we're dealing with government regulations. We're dealing with the virus. Anything can happen. However, I think Warner put a lot of thought into moving it to the 31st, and it has to do with their own marketing campaign, and it has to do with their distribution on a worldwide basis and what opens where. So I think we have to assume that it's going to open at that time. I think they thought a lot about it. I know Chris Nolan and Emma were very involved in it. And that's our working assumption. I think it's highly likely, but I can't say 100%. For Mulan, Disney announced its intention to open on the 24th. They announced it before Tenet moved. We sure hope it comes out on the 24th. And as a matter of fact, it presents an opportunity for us because when Tenet was going to open on the 17th, it would have been difficult in North America to play Mulan. But now that Mulan is earlier, we can actually play Mulan as well as Tenet. Again, this is -- it's proven to me so much more complicated than I would have thought because IMAX is in the middle of the ecosystem and we have relationships with exhibitors around the world, relations with studios around the world, with film makers and governments. You realize how complicated it is. So I think the studios want to do the right thing by exhibitors, by moviegoers, by filmgoers, by their own economic concerns. And it's really hard to figure out when the right time is, but I think I've never seen better communication between all of those constituencies, and I think everybody is very much trying to do the right thing and on the same page about how do we make this work.

And then for the rest of 2020, it feels like there could be other movies that shift. There's -- production has stopped. There was already -- Warner Bros. sort of pushed back a bunch of their movies and some slipped out of '20 into '21. How are you feeling about the rest of the year right now?

I think there's enough good movies out there who are far along in post production that the slate for this year will be quite good. You're right, things can move, but some of the movies were actually really good. Like I explained to you how we can now do Mulan and Tenet. Bond moved 5 days earlier, so that gives that a longer window to play. Wonder Woman moved into October, and I think that had a lot to do with the moving of Tenet because Wonder Woman was supposed to come out the second week in August. So it would have stepped a little bit on the toes of Tenet and got moved to August. Top Gun, of course, got moved to Christmas time. So I think the slate, as it stands now, is pretty well spread out. And the movies that I mentioned to you are all far enough along where there's not an issue with them meeting their release dates. I think if things move further, it would likely have to do with issues like capacity or second waves. But I think absent those things, there's a pretty good chance what's in place now for the year will hold for the year.

And then what about for '21 because that's the risk on the production delays, it feels like? There's -- it's unknown.

So '21 was scheduled to be one of the best years in the last decade. And there are currently 5 Marvel movies scheduled for '21. By the way, for '20, I forgot Black Widow, which is obviously a very big Disney-Marvel movie. It's -- there are a lot of movies, 5 Marvel movies. There are 2 DC Comics movies. There's Mission Impossible. There is Avatar scheduled for the end of the year. There's more I'm not remembering, but there's a lot scheduled. I think some of them are more advanced. King Kong just moved to '21. I think there -- Fast & Furious is in '21. There are a lot of movies that are pretty far along in their production process. IMAX just hosted a CEO forum a couple of weeks ago for about 80% of our world's box -- the world's box office with IMAX partners on a global basis. And we had Chuck Roven, the producer of Wonder Woman, talking about the scheduling, and he seemed pretty optimistic because the filming part of a movie is only really 1/3 of its whole production process. So he seemed to think that as production opened up, which it's starting to do now, it wouldn't affect the 2021 slate that much. But again, there are a lot of things there. So I think there's room for slippage. And it would still be a very strong slate, but it's subject to the caveat I gave you before, which is health issues.

Okay. Why don't we shift to PVOD? I think it's been a big topic. Trolls World Tour obviously was a big news story and the resulting dispute between AMC and Universal. It seems like it's -- something has to give there. So how do you think this could play out? What do you think on the exclusive theatrical window over time?

So I have to remind everybody that IMAX is in the blockbuster business. We play blockbusters. And I don't think that the issues around Trolls World Tour have anything to do with blockbusters. And people have focused on the fact that -- of the Trolls World Tour going PVOD, but every other movie that was scheduled during the year is scheduled, moved to a theatrical release, and that includes some of the ones I just mentioned, whether it's Top Gun or Tenet or Wonder Woman or Bond. So that was the exception. And anyway, I don't -- that certainly wasn't an IMAX kind of movie. And to give Universal credit, I understood why they moved it. It was scheduled to be released in April. They have spent purportedly $50 million in marketing money. And if they had to move it, that will be a sunk cost, and they would have to start over again. So it was a unicorn kind of event in that movie. They moved it. It did okay. But let's be clear, there is no evidence that a PVOD release is ever going to do for a blockbuster what a theatrical release did. And that's because the numbers were decent for it on PVOD, and Universal even compared them, to some extent, to what a theatrical release would have done, but it eliminated the ancillary windows. So after the theatrical release, it goes to electronic sell-through. It goes to television. It goes to streaming. There's lots of other revenue. International. After Trolls was released, it didn't go to -- well, it went to international, but because it had already been released and there's a lot of piracy, the numbers in international were quite small. So just -- if people come away with one thing, for blockbuster movies, PVOD doesn't work. For mid-level movies, it might work, the economics. But when you lose those ancillaries, it just doesn't happen. So there's been a lot of noise around it, a lot of media, as you said, but I think it's not going to have any effect on the kind of movies we do, blockbuster movies. For mid-level movies, the kinds of movies that compete with streaming now, it's possible that some of those will move, and it's also possible it'll have an effect on the windows for those movies. But there have been some interesting studies done in this period by a number of the studios that we've seen. And people's price point for PVOD, PVOD is $10 and below, and that's in North America. And the rest of the world isn't really equipped for large streaming releases. So again, the numbers didn't really work at $20. They certainly don't work at $10. And it's interesting why -- I don't want to digress for too long, but I think you'll find this interesting, which is when PVOD was at a higher price point, there weren't a lot of streaming services. So when you had Disney+ selling a slate of content for $6 and you have Warner just coming out and Universal and Netflix, think through how many people are going to pay $20 for 1 piece of content. So I just think it's a model that doesn't work right now.

Got it. Well, I just wanted to kind of touch on the fact that AMC is saying that they won't play Universal's titles. That could risk your screens not getting Fast 9 and Jurassic World sequels into your screens. So...

So I don't think so. First of all, I think things have warmed up there. I think what -- I think even Universal has said -- they have not said they're releasing all their films in PVOD. I think they've said some of their films they might do on PVOD. And I can't imagine films like Fast & Furious and Jurassic World bypassing the theatrical window. As I said, when we have more time in the real world, I can go through the numbers, but the numbers just don't work for that. I think Universal doesn't release a blockbuster of that magnitude until next year, so I think there's a lot of time to work that out. And I would make a big bet that this resolves itself.

Yes. I agree with that. So my next topic is sort of a post-COVID world. As the entertainment technology company, how is IMAX positioned beyond the current pandemic? And how do you think the industry will be changing?

So I think -- not -- 2019 was a fantastic year for us in China. We had record box office. Our network is growing globally by about 10%. We have a backlog which is equivalent to about 3 years of installations. I should say even during this period of time, we're still having a lot of dialogue about new IMAX theaters going up. So I think we'll continue to expand our global footprint. I think that people are going to create brands even more than they did before. I think there have been some changes in viewer habits just sitting on the couch and watching streaming things. But I think for blockbuster movies, what IMAX does, people are going to want to get out even more. I don't know if you saw the recent studies. Bloomberg had an article in the last day or 2 that there's been a backlash against streaming, that people really want to get off their couches and do different things. And I think to the extent they want something really different, that's going to play right into what IMAX does. We're also working on other new ventures, as you're aware, including a way to make images in the home look better. It's called IMAX Enhanced, a large televisions and some IMAX Live. So can't wait till it gets back to normal. And I would add that as an organization, we didn't furlough people. We moved people to 4-day workweeks. And we've had a very disciplined approach to what the future looks like. So we've got teams of people working on things like how we can analyze more data, how we can market better, how we can use artificial intelligence to benefit our company, all kinds of initiatives. So I can't wait to open the door and start to put some of these things into the real world.

Yes. That will be interesting. So Patrick, why don't you update us on your theater installs and backlog? How will the timing shift given the crisis and how will that impact your future financials?

Sure. Happy to. In terms of backlog, we're in close contact with all of our customers. And the important point is there's really no change. Historically, our backlog has been remarkably reliable. When theaters go into backlog, they come out as theaters. We don't see any attrition, and we don't expect to see any attrition from the [Audio Gap] our exhibitors have told us they plan on continuing to grow with us over time. But you framed it the right way. It's a question of shifting the timing of installations. Obviously, we're not doing installations right now. We expect that, that will start again as theaters -- as our partners start to get back into their multiplexes. But we do expect that installs will get shifted forward. Our partners are going to be focused on operations in that business. There's obviously changes in construction schedules for the malls where these multiplexes typically are installed. So we do expect that we'll be pushing things forward and have a reduced level of installations this year. We don't have specifics on timing yet, and we need to rely on our partners to come back to us. But the good news is we do expect that once things get back going again, back on a similar pace and have -- end up just shifting the curve out a bit.

Got it. And your balance sheet seems to be in great shape. Rich talked about a 2-year runway. You talked about a $10 million monthly cash burn rate. And how -- can you update us on that? Is that where you're about running?

Yes. That's -- we talked about that being our average cash burn once we had gotten the full benefit of some of the cost reductions that we've put in place, which we've now done. And we are tracking to that number, so we feel very good about that. We do have, as of our last disclosure, $350 million of cash. And with that modest cash burn, that gives us plenty of runway. And then you may have seen it last week. We announced that we have worked with our banks, and we've got covenant flex relief for the first quarter of next year and then flexibility through the end of 2021. [ Some ] issues on that front either. So we think we've done all the right things to protect the enterprise and give us real flexibility. And as Rich said, we also kept the team in place, and we think that we're ready to scale up very quickly and will lead the industry back when business returns.

Okay. And are there any other accounting implications from having a 0 revenue environment that we should be aware of?

Yes. Actually, it's quite interesting. There's a number of things that just are different when you've got what essentially rounds to 0 revenue. And some of this is really just going to end up being P&L geographies. So the second quarter will be a little bit complicated with some issues that we'll have to sort through our -- we don't have any absorption from manufacturing. So our teams and the money that we're spending there, instead of that getting picked up in cost of goods sold, that will move down to SG&A. We've got a similar example on the DMR side, where we take films and add value to them. Typically, that shows up as cost of goods sold on the DMR side of the house. In this environment, those also will move down to SG&A-type expenses. And then there are some things that are directly related to what we work through with our partners. So for example, we're not charging people for maintenance right now. We've extended all the contracts, so there's a 4-month period we're not charging. That will get tacked on to the end of the contracts. So that means that our revenues won't be reflecting maintenance. And then there are some of our theaters where we have minimum guarantees from our partners. Similar dynamic. We've suspended that for 4 months. We've extended the contracts. So ultimately, we'll still get that same earnings. Just we have a little bit of a time value of money reduction. So all of these complications filter through. In Q1, it wasn't too big of a deal. But in Q2, we'll have to spend some time walking people through these changes.

Okay. And Rich, with the 2 minutes we have left, do you care to sort of pontificate on when you think the U.S. box office can return to 2019 levels and then how IMAX share will change in the future?

So I'll start with the second part, which is easier, which is there's increased -- if you look at the movie industry from a high level, there's a greater concentration of blockbusters that's been in place for the last 5 years. And I think, if anything that will accelerate because I think with streaming going on, a lot of the smaller and mid-level movies will go streaming and the larger movies will go blockbuster and I think the studios will continue to make more blockbusters. So I think that will be very good for IMAX. And I think that will increase our market share over time as those trends continue. I think also, there'll be more of an interest in premium entertainment. I think, again, to the extent people have gotten a little bit used to being in their house, I think when they want to do something social, something cultural, something with their families, they're going to want to go to a nice, big IMAX theater. In terms of the box office, getting back to 2019 levels, I mean, I think if you assume that there is a vaccine or a treatment and that by early 2021, people are safe resuming their lives, then I'm incredibly optimistic about 2021. Because Avatar remains the biggest movie in IMAX's history, and that was over 10 years ago. And we did over $240 million 10 years ago. We -- I'm not predicting that this works on a numbers basis, but we have 5x as many theaters as we have then on a global place. And when you go back and you say 5 Marvel movies, Fast & Furious, Mission Impossible, I mean, it took us a year to design to be a record year. But again, you have to go by my assumption that we'd put this thing behind us and go back to what I said at the beginning. I think you just have to look at the macro trends. There's a lot of wind and IMAX is back. And I think no matter what the speed it comes back, when it comes back, we'll be very well positioned.

Yes. I think so. I agree. So I -- we're looking forward to seeing your screens open and good luck with the reopening.

Thank you.

Thanks, guys.

Thanks, Meghan. Appreciate it.