IMAX Corporation (IMAX) Earnings Call Transcript & Summary

Good afternoon, and welcome, everybody, back to our conference. We're very happy to have Rich Gelfond, CEO; and Patrick McClymont, CFO of IMAX joining us now. Hi, Rich, hope all is well. Also...

All is great, Jess. Happy to be here.

Thank you for coming. It's always great to have you. Let's start with IMAX positioning. You've evolved over time to become highly integrated into the fabric of the entertainment ecosystem with over 1,600 theaters in 81 countries. How do you think about the positioning of IMAX today in the overall landscape?

So we're very privileged to be in the middle of, not just the North American ecosystem, but a global ecosystem. But what that means is we are a premium experience for consumers. We're a premium offering for our exhibitor partners. We're a premium release window for our studio partners. And we've become kind of the global curator and server with respect of blockbuster content. So today, if someone wants to release a blockbuster pretty much anywhere in the world whether it's Korea, Japan, China and certainly, Hollywood, IMAX is a partner they want to have. And that privileged position enables us to have a kind of a disproportionate amount of influence for a relatively small company. So in the middle of the reopening now around the world, we've been consulted by the directors, studios, exhibitors on how to reopen on -- what the slate is that [ they ] get here in complex and how to order the slate a reasonable. We're in the middle of that. So our place in the ecosystem is very central to making blockbusters work around the world.

Great. So as a truly global company, IMAX has a unique perspective into the course of the pandemic. Can you give us an update on where you stand in terms of reopening screens around the world and the demand trends that you're seeing?

Yes. Around 85% of our screens, about 1,250, are open now globally. We're open in about 40 of the 80 countries we're in. And where we are open, there are limitations on box office on capacity. So in places like China, which is the farthest open along, it's around 50%, and places like the United States, it's probably in the 30s when you averaged in. In Canada, it's only about 50 people through -- per theater. So it's been opening. And so far, it's gone very well. And not surprisingly, where the capacity restrictions are the highest -- I got it backwards, where you have the highest capacity and where the disease is at its lowest point, you have as close to normal as you can get. So in China, opening weekend first blockbuster, in $800 million, we get around $115 million. Rest of the world Tenet opening weekend was $53 million. The United States was a little more challenged this past weekend when theaters opened. And the reason for that was, people don't even know which theaters are open and which places. New York and L.A. are not open yet. For IMAX, we did extremely well, 14% of the box office, but only 2 of our top 10 theaters for Dunkirk were open at this time. So I think that's all going to even out as people get more open. But for now, the better result to where they've been further along through the crisis.

Right. I mean, you have a great perspective here. You're so much ahead of most of the other companies. So you mentioned China and you mentioned Tenet, both of which -- China is open. Tenet has been released. How much -- let's go to Tenet now. How much have capacity restrictions limited attendance for Tenet? Are you seeing that the signs that attendance is becoming more spaced out during the week, didn't -- either new showtimes or increased weekday moviegoing? And what are the strategies can you implement to spread out moviegoing activity to take advantage of whatever capacity you have?

So just so we're still learning, again, the U.S. only opened a week ago as a practical matter. But what we saw in China a few weeks [ with that ] first, it was more spreading out on Friday nights and Saturday nights. It's kind of the -- with the reduced capacity at 50%, those were pretty much sold out, those shows. So no change from history, Friday and Saturday nights sell out. But what was happening though is the week day shows we're doing better as a percentage of capacity than you would usually expect and I think that makes sense, if you think about it, which is not everybody wants to go to the theater at the most crowded time. A lot of people still aren't back at work yet. A lot of people are spread out from their homes. So on a natural basis, we see more attendance during the week than you would naturally expect. Again, to put this in an interesting context, IMAX last year, 2019, was our best year ever and our capacity utilization was around 10%. And for a multiplex operator, a traditional exhibitor, a very successful multiplex is 20%. So in itself, a 50% capacity restriction isn't a big deal if you can spread it out. It's -- so it's peak periods. So we're looking at things like discounts to get people in on -- at other times as well, as I said earlier, the natural course of things, which will spread it out.

Right. Will new safety protocols implemented by your exhibition partners create incremental costs or impact margins for you?

So I'm glad you used the term exhibition partners. I'll remind everyone that IMAX is not an exhibitor. We're a technology provider, and we've provided to our 1,600-plus theaters around the world and our hundreds of partners. So they license IMAX technology. They provide the experience. So whatever incremental costs there are because of the COVID protocol is absorbed by our exhibition partners. However, because of our position in the ecosystem and with our partners, we're extremely involved in trying to ensure that the beers are safe. So we played a leading role with NATO in the U.S. and others exhibitors around the world in trying to ensure that masks were acquired, that there was cleaning protocol, the circulation systems and things like that. Another thing about going to theater, which isn't widely discussed, is movies are a respiratory passive experience. It's not like you're at a restaurant or a bar or a live event where you're talking and screening. You're sitting with your head facing the back of someone else. And the screen is silent . And again, the -- there is social distancing required in a lot of places. So many people who have gone in the past few weeks, including some of my personal toughest critics, my stepson who said, "Rich, I'm never going to go to the movies. It's not going to feel right." went to Tenet, and he called me back. He said, "It was amazing. Once I was there, I felt extremely safe." And that's been a feedback we've heard from a lot of people.

What still needs to happen to open up the rest of your theaters that are currently closed? And which markets are these theaters even then?

So there are a number of countries where there are theaters closed such as in South America and other countries that have very few open because they're just emerging. India's theaters are closed at this point. But the most important ones for us are probably in New York and in California. And California, as you know, the incidence of COVID is still relatively high. However, that's been opening piece-by-piece. So I think today, Orange County opened and some other counties opened. San Diego opened over the weekend. And there are some others. New Jersey just opened last weekend. New York is a little bit of a head scratcher, for me, Jessica, because New York has opened bowling alleys and it's opened casinos and it's opened gyms and parlors, and there's no question going to a theater is a lot safer experience than any of those things. So I'm hopeful and both Connecticut and New Jersey have opened, and usually, they act in tandem. So optimistic that, that will open soon. And one of the interesting points about Tenet, for example, is it plays -- if you look at Chris Nolan's movies, they historically do a lot of their best box office on the coast. So the fact that on the last weekends was good, but as good as it could have been, was largely influenced by the fact that the big Nolan box office territories were closed.

Right. It's probably a good sign that Governor Cuomo said today that indoor dining in New York will happen at the end of this month, but it's just limited to about 25% capacity, probably good for you. But for places where theaters are open, what are the next steps to achieving higher caps? Like what needs to be done to increase the capacity?

So I think, first of all, it's a regulatory question, right? So it depends on the jurisdiction. As I said, we're in 81 countries. So you could just imagine that what a major exhibitor is in dealing with all of that. I think it's a question of cases going down and the governments feeling safe. So in China, we opened with 25% capacity. After 3 weeks, it went to 50% capacity. And there are rumors that around October 1, which is the Chinese holiday, it will open up to 100% capacity. Because we were closed for Chinese New Year, a lot of the films that were scheduled for then are coming out in October for Chinese National holiday. So I'd be -- although I went through the capacity numbers before, it's not a significant negative. It would be nice if that started to happen. In the U.S., I'm guessing that it's going to be very similar. It's going to be when places feel that the COVID counts are down and that people are more comfortable and it's going to be up to local government regulations, not really the exhibitors to figure that out.

Let's switch gears a little bit and just talk about your company, like what's your perspective on the disconnect between valuation and pre-COVID company performance, especially given your strong liquidity profile and demonstrated post-COVID box office success? I mean, what do you think the drivers are of this disconnect?

As you know, Jess, you are probably more of an expert at valuation than I am. But it does surprise me. If you look at IMAX stock over the last 5 years, it's traded over $20 like almost without interruption during that period of time. And obviously, when the theaters got closed, and it was unclear as to when they would open and how broad the pandemic was, I understood the price going down a lot make sense. But now that we've pretty much opened throughout the world, and the results are extremely promising. So in China, if we looked at it by tiers, first tier through bottom tier and in every tier, for the period we've been open, which is like a month, we're actually performing at the same level or a little bit better than we were pre-COVID. In Europe, there's a lot of positive evidence. I guess probably the biggest disconnect is North America. I was kind of saying to a lot of the Hollywood executives when they hesitated opening. Everybody is my office. So in Hollywood, you look at the number of cases that are in California, and you worry about the world. But in fact, as you could see from the results of openings and some of these movies, most of the world is really safe. So my expectation would be when people can look at their windows and see the same things people see in the rest of the world that the valuation will ride itself.

Right. I mean what is your outlook for the remainder of the year in terms of box office? And then how do you think 2021 will shape up for the industry here in the states?

So I'll answer in reverse. I think 2021 is going to be incredibly strong. And the reason is because you have all the 2020 movies which didn't get played this year, which are moving to 2021, plus those that are made for 2021. So some examples of ones that moved are Fast & Furious and Top Gun and a number -- some of the Marvel movies moved from this year to next year. So you have those that are already done and ready to go. For next year, you have a lot of movies that are already in production, like Jurassic World and just a lot of other movies are backup. So those will be right. And a number of Marvel movies are backup. So those will go to the second half of next year. So next year's slate should fill in really nicely. For this year, there are a number of really good blockbusters scheduled. There is Wonder Woman. There is the next Bond movie. There is Black Widow, but I -- a lot of things, a lot of pieces are still moving around. So IMAX is in a very enviable liquidity position wherein, to the long run, we're quite convinced that '21 will be great. '20 started in a very good way so far. And I think we'll just have this -- the titles in there, but we'll just have to see North America, how they play out. And the rest of the world, for example, I mentioned China earlier, it's the national holiday, and there are tons of movies. So I think on the rest of the year, in China, it looks really good. And we do play a lot of local content in other territories. So in Korea, we played a film called Peninsula, which did $20 million in its opening weekend, like we played Japanese movies in Japan. So if you look outside North America, I think '20 looks very good, and '21 looks very strong also.

Are you concerned that all of that release schedules being too crowded in '21 and maybe '22?

Well, obviously, that's a high-class problem if it happened. Typically, IMAX plays movies for 1 or 2 weeks other than exceptions, such as Avengers or a Chris Nolan movie or what I'll call it really mega, mega blockbuster. So I think if you look at 1- to 2-week play times, still be enough distance between them. And one of the functions IMAX serves it's a little bit like the global, as I said, curator earlier of blockbuster films. So I think a lot of films won't be released blockbusters unless the studios and the filmmakers are unsure of having an IMAX run. So I think they'll delay on and they'll move their schedules around. Years ago, films used to open on top of each other. But that has not happened much less. So I don't really think that's going to be a problem. I think that it will work itself out.

So internally, you said, like, you're -- you really are at the center of like film releases. How do you think about the slate each year from a planning perspective? And what adjustments can you even make to optimize the slate for '21 with all these moves moving around? How do you plan?

So it's been an interesting year to say the least because usually, you slate at the beginning of the year and you play it out and you talk to different studios. So for example, Disney said they are releasing a Marvel movie this day, and Paramount says they are releasing Mission Impossible this day. You say we can do that one, but not this one and that's one reason why it kind of flattens out because I think the studies want access to an IMAX release. That's really important to them. In a year like this one, it's been a little bit like whack-a-mole. So every time you like hammer down, one really -- something else moves. But it's been -- I think this is a made-up term, but it's something like 3D whack-a-mole because everything has been coming at you for all -- from all directions. So I think you have to be just as agile as you can be. And remember, again, where all these countries in the world, there are foreign releases. So our distribution executives have -- are all turning prematurely gray, but we're just trying to keep up in real-time with the changes that are going on and trying to fill in things. And again, for us, I think if you look at 2020, we would say the most important goals for us in 2020 were to get the theaters open safely, get people back to the theaters and prove that blockbusters still have the same allure that they've always had and why people come to them. And that obviously, it maximizes revenue. But since we have the luxury of a strong balance sheet, it's been much more important for us to prove out the long-term continued viability of the business model on a global basis and grow our global footprint. So we keep mixing around movies to make sure that happens. And then in '21, I think, as I said earlier, it will be an [ embarrassment to Rich ].

Right. And then following AMC's deal with Universal allowing the studio to go PVOD, just 17 days after theatrical release, how much risk does the potential shortening of the theatrical window create for the industry, if any?

Well, first of all, for IMAX, it doesn't create any because we're in the blockbuster business and even Universal has said that the shorter windows aren't going to apply to blockbuster movies. And even if they do allow movies at 1 to 2 weeks by and large. So I don't think it'll have much of an effect on us. That model with AMC and Universal, for now, hasn't gotten a lot of traction. As you know, no other large exhibitor has signed on and no other studio has pushed forward that model. And frankly, I'd be surprised if anyone signed on exactly that model. I just don't think that's going to be the blueprint for the industry. However, I do think one result of probably the fact that studios own streaming services more than anything else, is that the windows, in particular, mid-level movies will start to compress on to some extent. And I also think some of the mid-level movies will be released direct to streaming rather than the way they are now. So I think for a regular exhibitor, there'll be less nonblockbuster films available. Do I think that we have a shot? I don't. And no one has really talked about this, Jess, and there's no time today, but it's an interesting thing, via -- this floor of 1 year, May terrific conferences. It is, will it bring the streaming companies into theatrical? And I think the answer is probably yes because one of the reasons that streaming companies have resisted at the actual run is because they have wanted to wait out the 90-day windowing period. And Apple already announced that it's going to respect the windows. And in fact, Scorsese brought his new movie, the DiCaprio movie to Apple and not Netflix, partly because Scorsese said he wanted a theatrical run. So yes, you will lose something, but the unknown question is what you gained if the window is different.

I mean, that's exactly what I was really going to ask you because Netflix just they bypass widespread theatrical release opportunities. But in July, they announced another high-budget movie, The Gray Man, which is like $200 million, I think. Do you expect Netflix to get more active in exhibition since the shorter windows were a key factor in previous discussions?

Well I'll probably get in trouble for saying this. But Netflix was having discussions around the Irishman about releasing it theatrically with shorter windows. So we already know that philosophically they're open to it because they discussed at that time. I think they're opposed to the windows the way they stand now. So I wouldn't be shocked if in this new world, that's a different sill windowing system. And I should started by saying the model for blockbusters doesn't really work without a theatrical release because you really can't -- you can do any math you want do, and you cannot recoup the $200 million budget through a streaming release. It just doesn't work and lots of people have done that. And by the way, the whole direct-to-consumer proposition, pay-for-sale has been on a down slope for years and different direct-to-consumer services have tried this forever. The answer to that now, you could stream it, is not going change that paradigm. But I do think it will loosen only those for certain movies, as I said. And I do think in that time, I would expect -- and especially competition so you're going to have Disney streaming, you're going to have Universal streaming as well as doing theatrical. And Netflix is facing competition. And my own guess would be that they'll be more flexible with their modeling.

Right. Well, that's exactly what Bob Bakish said in the presentation before you regarding Paramount. Let's bring Patrick into the conversation. You were able to sign new deals in the second quarter. Even amidst COVID disruption with international partners, CGV and Wanda, adding to the backlog. How do you think about installments in the second half of the year and heading into 2021 to keep up the demand for your backlog?

Sure. Hi, Jessica. We're pleased. Actually, we're pleasantly surprised with the level of dialogue that we maintained with our clients throughout this. You would have been -- it would have been normal to expect that things would have slowed down and [ even a ] pause, but it really didn't happen. In the first half of the year, we installed about 15 theaters. So far Q3 to date, we've done about 14. It typically does ramp up over the course of the year, and that will continue as we head into the fourth quarter. And so our installation pace, it won't get to where it was like the last couple of years, but it is on a nice recovery path. And our backlog is held together. We're at 533 systems. Our clients continue to want to grow with IMAX. The dialogue, they've continued to ramp up. They think about their business in terms of decades. And they want to grow their business. And they want to do it with us.