IMAX Corporation (IMAX) Earnings Call Transcript & Summary

Great. Thank you every one for joining today's fireside chat with IMAX' CEO, Rich Gelfond; and CFO, Patrick McClymont. We're going to have a discussion on IMAX's growth strategy, the future of movie going, including PVOD and subscription programs. The current state of exhibition, including the effects of theater closures and state home measures on the industry to name a few. First, Rich, Patrick, thank you so much for your time and for making yourselves available. Although we normally start, I think, discussing some of the long-term prospects and strategies of the business. Given theater closures and other challenges that the industry is currently facing, could you just describe for us where we are in the reopening of the global theatrical circuit and for IMAX specifically? And could you talk a little bit about some of the things that IMAX is doing to manage through the current reopening process.

Sure. And thank you for having us. Michael, we find this to be one of the most useful conferences of the year. So for IMAX it has been -- we've experienced a longer, more involved story than almost anyone because we're global, we're in 81 countries, so we started to shut down the end of January in China. And then by March, we were -- in mid-March closed pretty much throughout the world. So over the last number of weeks, we have been reopening. We've reopened in 50 countries right now and about 80% of our theaters are open about 1,300 theaters around the world. And it's been an incredible learning experience for us. The bottom line is that where it's safe to go to cinema, people have been turning out, and they've been turning out in very good numbers. And that's been a good thing for us. And it's been kind of a rolling opening, and there's been different capacity things. I'm sure we'll get into that in different changes. I think one of the better things I can say is we had a very good balance sheet going in. We said we had a cash burn rate, as Patrick will talk about later, we actually expect to go cash flow positive by next month. So the reopenings, although not nearly where they're going to be eventually have been a good thing for us.

Great. So let's talk about some of the most recent films Tenet, which was the first blockbuster to hit the market since the pandemic started. It opened in the United States on September 3. After international openings, I think that started on August 26. Could you just give us a little bit of a post mortem on Tenet's performance domestically? And what it taught you and the rest of the industry about the moviegoing recovery?

So I think its early for a postmortem because it's still going on. One of the things, as you know, is that all the theaters haven't opened up in a lot of places, including New York and Los Angeles. And in fact, in New York, it's a little bizarre because bowling alleys and gyms and things are open, and you could go right through the tunnel to New Jersey. So the U.S. kind of patchwork opening with limited capacity has certainly had an impact. And we hope Governor Cuomo opens New York soon. We really don't understand why it's not, but that's for a different audience, Michael. So the idea of Warner was to open on a rolling basis. I think they came to the conclusion that there wasn't going to be a point in the near term, where it was going to be safe everywhere in the world, and people are going to feel like they wanted to get to theaters right away. So they started by opening it internationally, except for China, then it opened in China and the United States a little bit later. And the results go back to what I said in my opening comments, where it was safe and where there was capacity, the movie performed extremely well. So in China, it did close to $30 million on its opening weekend and IMAX indexed 18% of the country. So think about that, where there was pretty much very -- we were about 1% of the screens, people really came out to sit in IMAX and that spoke to our brand and awareness and how people feel about that there. And the rest of the world outside of the United States, it opened to over $50 million. And -- which was good and IMAX did 10%. In the United States and in North America overall, there were much -- there was only about 60% of the network open, and there was severe capacity limitations in some places. So for example, in Canada, you could only have 50 people in a theater. So it was very low. And also according to some of the research that was done, less than 40% of the people, even new theaters were opening because, for example, New Jersey opened the day before the movie opened. So with all of that going on, I think the U.S. had a weaker result, and I think that was probably predictable because the theaters were just opening, and there's a lot of communication going on. And I think the plan was to -- going back to this rolling opening, get the world open, and then have follow-on movies come afterwards, and it would show that people felt safe going to the movies. As you call it in the postmortem, I think in the rest of the world that played out very well. I think in the U.S. despite this incredibly innovative approach by Warner, there wasn't enough awareness at that point. So I think it got opening slower and hopefully, the movie will have legs going forward.

Right. And with New York and L.A. closed, that probably has an outsized impact on a film like Tenet, which probably does well in those larger markets.

Yes. As a matter of fact, I should add to that. When you look at kind of psychographic data around Tenet, the biggest fan bases are on the coast, and that's where the reviews are, and that's where the buzz has spun out from, and it was bold but difficult under those circumstances.

Right. So the discussion around Tenet is a good segue into talking about what's happening in China. To your point, there were some promising results in China between Tenet and The Eight Hundred. Could you just talk about how the Chinese recovery is going and whether or not you think that's a good indication of the path that markets that are a little bit behind China in the recovery, will be able to recover globally?

Yes. So China is going extremely well. The Eight Hundred opened 3 or 4 weeks ago, and it did $115 million its opening weekend. So that was the -- for us, for IMAX it was the third best opening of a Chinese film. So that's a place where people felt very safe. And that was despite the fact that there were 50% capacity limitations, in China. And so I do feel optimistic, and I do think it's going to be a model for the rest of the world. As a matter of fact, China announced yesterday, that on September 25, it's upping its capacity to 75%. And when you think about a theater 75% is pretty full when you picture the front couple of rows typically aren't a place people want to go. So -- and the Chinese national holiday starts in a couple of weeks, October 1. And I think you're going to -- and a lot of those movies were moved from Chinese New Year. So I think you're going to see a very strong recovery in China. It's very promising beginning, and there's nothing unique about China. That's -- other than the fact that they're ahead of the rest of the world to suggest that the world won't follow, so I do think it's the model, Michael.

Great. Let's shift gears and talk a little bit about the film slate. First, can you help us think about what's most exciting for the remainder of the 2020's film slate? And what are you most looking forward to in 2021? And maybe you can also talk about whether or not it's even worthwhile to talk about the film slate, like are those films set in stone? Or do you see a risk of them moving, given how dynamic the situation is?

So let me start by continuing my answer on China. So China has this national holiday period, starting October 1. And a lot of the best movies of the year, which couldn't be released on Chinese New Year were moved into that period of time. So we're incredibly excited about where that goes, and we believe the rest of the year in China will be very good. There's a lot of content there. I think we have a lot of local language content outside of China, in places like Japan and Russia. Japan just lifted its capacity constraints also, it had been 50% and effective this Friday, it goes to 100% and Tenet opens in Japan. So we're pretty optimistic about given the awareness and the capacity that will do very well there. In the rest of the world, I think there's a lot of local language content and a number of films coming up. When they get to the -- when you get to the U.S., it's a bit of a question mark. There are some very high profile, terrific film schedule. There's Black Widow, there's Bond, Wonder Woman just moved to Christmas. But I think we're cognizant of the fact that things are moving around. So -- and actually, of those films, they all have IMAX DNA in them and IMAX special features. So there are a number of smaller films around that. But if things hold, we feel very good for the rest of the year, but we'll have to see. Since we have a strong balance sheet, and we're in it for the long run, we're more focused on when does the full recovery take hold on a global basis. And for next year, very encouraging releases, partly as a byproduct to the pandemic because films didn't get released this year they're moving into next year. So a lot of things are in the can that are very promising, including Top Gun, the Tom Cruise movie, Fast & Furious 9, a number of Marvel movies, including The Eternals that didn't get released this year, Kong Vs. Godzilla (sic) [ Godzilla Vs. Kong ]. So those are the ones that are already slated from this year. In addition, there are a lot of high-profile films in production. Productions opened up around the world. As a matter of fact, I read somewhere, it's going to open up in New York shortly. I think it's opened up in California. And those films include Jurassic World, which is back in production, Mission Impossible, Avatar is back in production. So I think in a way, when you look into 2021, it looks like an embarrassment of riches, particularly for IMAX, which is in the blockbuster business and all the blockbusters that didn't get out this year plus those scheduled for next year all come together. So we feel very good about next year.

That's great. So production is restarting. The box office slate looks like it's going to improve into next year. Let's talk a little bit about network expansion. I think a bit less than half of IMAX's global screen footprint is in China right now. Once the pandemic subsides what's your outlook for network expansion in China? And I just asked about China specifically because that's historically been the region where you've seen a lot of network expansion, but commentary around any other regions would be helpful as well.

So we have about 500 theaters in backlog. We've been installing new theaters and opening them since July. We're scheduled to open a significant amount of theaters for the remainder of this year on a global basis. Also, we had a number of signings. It's kind of hard to believe in the middle of a pandemic. But we signed a fairly significant deal in Korea and another one in China. So people understand that the premium IMAX Experience is going to be valuable when the world returns to normal. So I would think we'll still have significant growth in China. We're discussing a number of new things in China that aren't yet done. The Middle East is an incredibly exciting territory for us. In Saudi Arabia, I think we have north of 20 theaters in backlog, and we could do significantly more than that in the country. But for Tenet, which we're just talking about at half capacity, we averaged $55,000 a screen for our 2 theaters that are open in Saudi Arabia. And we think we're going to open more this year and certainly more into next year. Japan is a very promising market. Our per-screen averages there are among the highest in the world, and we have a good backlog there that's opening and a lot of interest. Korea, where I mentioned we just had another signing. Korea is also one of our highest per screen territories in the world. And that one has a lot of potential. Western Europe, France, we have a significant way to go, Germany. So I think it really is global story. As you know, North America is highly penetrated, but in the developing markets where cinema is still growing, that's where we have the most potential.

Great. That's really helpful. Local language films are becoming a more important part of the IMAX film slate. And we've certainly seen that with the success of The Eight Hundred in China, which, I think, continues to do really, really well despite competition from Tenet. Could you just talk about the role of local language in your programming strategy? And even after the pandemic, given the resonance with local language in some of the Tier 3, 4, 5 cities in China, do you see that being a more meaningful part of the slate going forward?

So it was always part of our strategy to do more local language films. And as you know, 2/3 of our revenue is outside of the United States, one of the -- I think messaging problems we have is getting people to understand that the North American box office and North American exhibitors are not a great comp because that's only 1/3 of our business. So we've been focused for a really long time on how to get more local language films and in fact, we have 9 slated for the fourth quarter of this year, which is more than I think we've ever had in a quarter. And those films are in various places, including China, including Japan, including Russia, which is some of our best markets in the world. So we've been developing. We have concrete results coming as soon as the next quarter. But I think it's particularly important this year, where you do have the pandemic, and you do have uncertainties and there are moving targets in the Hollywood releases. So there was always this really good reason. We go where our business is globally. But this year, it's fortuitous that a lot of our releases are coming at a time when the movies here a little bit of a moving target.

Right. And we spoke a little bit about network expansion earlier. IMAX did sign a few notable deals this year, including a 17-theater deal with CJ CGV in June. And a 20-theater deal with Wanda in July. Could you talk about the pace of signings this year and what you're expecting in terms of installations for this year and next? And if you're not able to get specific about it, maybe just talk broadly about when installations could get back to normal?

I'll turn that over to Patrick.

Sure. Yes, we're very pleased with those signings. I personally was surprised. I would have expected signings to really slow down during this period. But the reality is our salespeople maintained a very active dialogue with our clients throughout this process. We're able to convert those 2 deals, which were meaningful. But we've also got active dialogue going on around the world. And the reality is our partners plan on continuing to grow their business. There's white space on the map, there's opportunities for them to grow. And they've concluded that growing with IMAX makes the most sense. So we've been quite pleased with that. On the installation front, I would say it's similar. It certainly -- it's always slow in the first half of the year. It was slower this year, as you'd expect, some of that was we simply couldn't get into facilities. Some of it was that construction of the mall or the multiplex slowed down. It's ramping up in the third quarter, and it'll ramp up further in the fourth quarter as it always does. We won't get to the same kind of levels we did in 2019, but it is ramping up. And as we talk to our clients about next year, we'd expect to further ramp up. In essence, we think that -- well, the backlog is held, as Rich described, we actually have 560 total theaters in backlog, of which 460 are new, 100 are upgrades. That backlog has held strong throughout this process. The installed curve has been pushed out a bit, but we're still confident that we'll be installing those theaters.

And not surprisingly, some of your exhibitor partners have been challenged in the current environment. Could you talk a little bit about which exhibitors are your biggest customers or counterparties? And what conversations are you having with those exhibitor partners as it relates to the IMAX JRSA agreements?

Sure. Well, first, you used two different words. We don't have counterparties. We don't have customers. We have partners. We're in the partnership business, and that's how we treat all of our exhibitor partners. And we are in business with all the important exhibitors around the world. And we maintain a very close active dialogue with them, and we're pleased. We went into this crisis in a position of strength, and we did some smart things to make sure that we had staying power. And so have our partners. They've raised capital where they have needed to. They've negotiated relief where they've needed to. So we think the industry is doing all the right things. And now things are opening back up again, and we're back on a revenue path. We think we've turned a corner. So when we looked at it, we really went to all of our partners and said, we're going through this together, let's push the pause button. And we pushed the pause button with everybody for about 4 months. And that means we didn't collect minimums. We didn't collect maintenance because we couldn't service the theaters, they weren't open. But we took those 4 months. So we just tacked them on to the end of the agreement. And so -- and that's made sense to us, and that made sense to our partners. Pretty much everybody agreed to that. And that's kind of it. We ask people as part of that to affirm that they owed us some money, and they were going to pay us that money. And we think we're in a really good spot with all our partners.

Great. And let's talk a little bit about IMAX's relationships with filmmakers. This year, you guys have Tenet, Wonder Woman 1984, and the next James Bond film, No Time to Die, they were all filmed to varying degrees using IMAX cameras. So can you talk a little bit more about IMAX cameras, the importance to filmmakers and how that affects indexing or IMAX from a profitability perspective?

When -- when we use our cameras, we call it IMAX DNA, and we have different things, either the cameras or sometimes the aspect ratio or sometimes one or the other. And when we put more IMAX DNA in a film, it tends to over index. So what I mean by that is for typical blockbuster, maybe we'll do 10% of the North American growth. But when you use IMAX cameras, we'll do a higher percentage. So one of the outlined examples on the positive side is, I think, on Dunkirk, we did 22% of the U.S. box office. So we encourage filmmakers to use cameras. We work with them. And in fact, we've developed ways to add lenses and other features to cameras that filmmakers are used to that takes their typical camera and makes it more -- they can use that and create an IMAX result. So we've done more and more of that. And anecdotally, as you know, Chris Nolan's done a lot of his movies. But when the Bond movie was filmed, they intended to do a little bit of it, but they love the way it looked and they love the cameras and they want to do more. And the same thing with Wonder Woman, as a matter of fact, the producer that wants to do more with the cameras. So that's a trend that's been happening on a global basis, The Eight Hundred in China was filmed with IMAX cameras, and I think you'll see more of that in the future.