IMAX Corporation (IMAX) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Meghan Durkin. I'm the Theaters Analyst at Crédit Suisse. This afternoon, we have IMAX. We have the CFO, Richard Gelfond. Rich, thanks so much for being here.

Thanks, Meghan. Hate to correct you so early, but I've been the CEO for over 20 years, so...

I'm so sorry.

That's okay. I thought I got demoted and I missed the press release or something.

I am so sorry, I apologize for that. So I think it's a really interesting time for this discussion. And we have a lot of good things to talk about besides your demotion. Sorry.

Let's start with the domestic market, where we've been -- beginning to see signs of life. Why don't you give us an update on the domestic reopening? Where are you still closed, where are you capacity restricted, things like that.

Okay. Well, it's hard to answer that being very specific because it's such a tangle regulatory web. So there's not only state regulations, but different exhibitors have their own policies. People who say they're open, they're not really open. They're open a couple of days a week. But more or less, if you look at IMAX's capacity, we're about 50% blended rate of what our capacity would be across the country. It's supposed to open to 100% today in both New York and California, which are huge markets for us. But again, I wouldn't want to be held to that because there are still rules by certain exhibitors or in certain counties that there has to be an empty seat between people or empty rows. So I think you should think of it as about 50% blended today and trending up to 100% in the next month or so. I do think F9, the Universal release, which is a couple of weeks from now, comes at a very good time because I think a combination of the reopening -- today, there was a survey release that showed 76% of the respondents would be comfortable going to a movie in North America, which is way up from a couple of months ago, and building on the recent box office. I will look at that date. But I think really fully open, fully operational, I think we expect like the third quarter to be when results would be comparable to before this all started.

Okay. That's helpful. And there's -- you don't have any theaters where they're actually selling all of the seats?

I don't know the answer to that because it's complicated, as I said. I don't have vision.

Sorry?

Because -- remember, we don't own or operate theaters, we're a technology licensor. So the exhibitors are our partners, and we have the results, but really don't have visibility by a state-by-state or city-by-city basis, how many seats they're selling or blacking out.

Yes, that's interesting. So then if you're -- how do you then assess how you've been doing so far? Because the numbers, if you've got the capacity restrictions, you've got fewer films. How do you even think about the box office and how it's been ramping?

Well, first of all, we use international as a benchmark because we've been fully operational in a number of countries, with around 75% capacity limitations. And you look at China, where Chinese New Year in the industry was up 30% from the record year of 2019. You look at Japan, where Demon Slayer has done -- has been the highest grossing movie of all time in Japan. And [indiscernible] is the second highest grossing of all time. So I think it's safe to say where it's safe and where it's open, we've seen business as good as or better than pre pandemic. And we look at a measure called indexing, our percentage of the box office. And our percentage of the box office has been higher than it was in 2019 in those places. In the U.S., in the first quarter, we did about $20 million in box office. And this year -- this quarter, we're well in excess of that with another month to go. And with, as I said, F9 opening in a couple of weeks, so we've definitely seen traction come back. You ask me how we can figure it out, one way would be for Godzilla versus Kong, we had 1,000 sold-out shows, which was almost every prime-time show we had in North America. Now the numbers were good for us in the indexing, but they weren't like they were pre pandemic because the sold-out show was probably in the a 30% to 50% capacity range.

Right. So then maybe touch on some of the titles. I mean, how are they starting to trend as demand is increasing? Are they holding up better? Or are people sort of starting to come back and see them in this week [ 2 ]? Or are people waiting to see movies?

The numbers are encouraging that we've seen so far. I think the biggest issue right now is that the studios really hold back a lot of their slates. And despite a lot of the talk of streaming, virtually every blockbuster or almost all of them were postponed. They weren't put on streaming services because the studio understood to optimize their box office they needed a healthy attendance at theaters. So right now, there's a lot of things scheduled beyond F9. A couple of weeks after that is Black Widow. Heading into the fall, Suicide Squad, Dune, Bond with IMAX cameras, Maverick: Top Gun with IMAX cameras. The rest of the year has a lot of good things going on. What happened was you add all this content that was made for 2020, and it was delayed, so a lot of it is spilling into '21 and '22. So the amount of content is actually an opportunity starting to go forward then. And I think, as I said a minute ago, you're not going to see the real traction or back to 2019 levels, I don't think until Q3.

Yes. That's -- I think that's what a lot of the theater operators have been saying the last few days. So I wanted to kind of touch on those numbers outside of the U.S. because they were very big numbers and record numbers and a lot earlier than our recovery even started. So what do you think drove that? I mean -- and what are you seeing in these other markets still at this point? Because a lot of -- you hear about the holidays in China a lot. But what are you seeing from every week now in those areas?

Well, it's content driven, obviously, like the movie business always has been. And I think there's no question that the lack of Hollywood content has kept those numbers lower than they would otherwise be. So it's been almost exclusively local language films that we've shown. And it's kind of incredible, the business we've been doing on local language films. Our market share in China was about 3.5% before the pandemic, and our market share has been around 5% since the pandemic on local language. In contrast, our market share in China is around 10% on Hollywood films. There just haven't been many Hollywood films out there. And the films that were, were ones that were released simultaneously on PVOD or soon thereafter because of COVID in North America. So we really haven't had a true test yet. Although I think F9 was probably the first true test in Asia. It did $135 million in China in it's first weekend, and I think it was $167 million internationally during that period of time. So clearly, there's a tremendous amount of pent-up demand. People clearly want to go to movies. And what I said to you about Japan is truly amazing. I mean, think about this, the 2 biggest movies in the history of Japan, and by the way, the 2 biggest movies in IMAX's history, happened while still at 75% capacity and not long after the pandemic. So I think when people feel safe, that pattern is going to hold in the rest of the world. And I expect the U.S. to bounce back very quickly. And then when you look into 2022, I mean the slate is ridiculous in a good way. There are a number of Marvel films scheduled. There's Mission Impossible, there's the next Avatar coming out. There's just a slate -- every week or 2 there's a blockbuster. So I think a combination of pent-up demand, the number of movies that are still available and the global box office, I think you're going to see a strong rebound in the second half of this year and '22.

And are there areas where your theaters are closed outside the U.S.? Because Germany is still restricted, I think. Is there some areas you're not open?

I don't know whether it's not open, but there's certainly diminished capacity in places like Latin America and India. The Middle East has recently opened up in a fairly significant way to very good results. But I think navigating some of the health issues there, as a matter of fact, people don't realize it, but Canada has had a very difficult time during COVID. So there's still a number of theaters shut down in Canada. So that obviously affects the North American box office in the short run. But I should remind you that only about 1/3 of IMAX's revenue comes from North America. So the last 6 months, we've had positive EBITDA and we've been, when you combine them, cash flow positive. So for us, this isn't like I understand for regular exhibits, like when is it going to open? When is it going to open? But for us, it's not like a light switch because we're not dependent on North America. It's a faucet, and it's been opening steadily and nicely, including over the last couple of months.

So you talked about those local language films in Asia, and those phones also came here. And did they do good numbers when they were here in the U.S. for you? And is that something that could be additive to your business if we start to import more movies from overseas?

I think that's a really good question. And I think that there's no question in terms of global market share that local language films are going to take more market share because the biggest film last year in the world was The Eight Hundred in China, which was actually filmed with IMAX cameras. And just to give you an interesting statistic, in 2019, which was IMAX's biggest year ever, we've done almost -- we're closing in on double the box office in local language over -- we've done about $130 million so far in 2021 on local language films, which is almost double what we did in our record year, 2020. So I do think local language is going to be more a part of the consciousness of global consumers. The most obvious place will be in market share in those countries. So China didn't really have science fiction, it had less romantic comedy, but people in those countries, because of the pandemic, got used to seeing different types of local language films. And I think that's going to continue. And I think that's going to be incremental to our box office in those markets. In North America, I think it will have an impact. And Demon Slayer was a huge success when it first came out on a relative basis in the United States, the Japanese anime movie. But I don't -- those numbers are rounding errors to Hollywood. So I think the biggest change in the local language would be in the international markets. I think no matter how good the Hollywood films play there, the market share will be down a little bit because I think those habits have changed. But in the U.S., I don't think it's going to be significant.

And so for the rest of the year, I think there's -- you talked about some big films that were basically filmed in IMAX cameras. So there's going to be -- Fast 9 is going to be probably their first big movie, and then you expect to be fully open here. So what are you expecting from the rest of slate this year? And which are the biggest films that you're most excited about?

What I expect from the slate is, as I said, I think it will ramp up as the year goes on. And I think there is still remnants of COVID behind us. So as you know, Warner Bros agreed this year to do simultaneous streaming on HBO Max as well as release in theaters. And Disney is moving away from it a little bit. The next couple of movies still have a PVOD component out of the box, and then they go to a 45-day window. So I think there's no question that, that will affect the box office to some extent in the near term. I don't think it will affect IMAX that much because I think, by way of example, if you're going to see Black Widow, I don't think you're going to compare in your own mind an IMAX experience to a $30 PVOD experience. If you're willing to pay $30, I think you'll go to IMAX because it's so different than what went on in the home. But I think some of the examples of that, you look at Quiet Place and how well it did because it hit a 45-day window around that. So as that gets to back to normal, that's going to be -- I think, drive the numbers. I think that as people feel safer and continue to get back and a large percentage of people who've gone to the movies felt really good about it. We have to remember that the pandemic was such a black swan event, not only did it cancel movie going, but it changed the release patterns of the studios. And it was always meant to be a short-term solution for a short-term problem. And virtually every studio is going back to some kind of windowing. So I think when that stuff works its way through the system and films such as Top Gun: Maverick come out with their own windows around them, then I think we'll -- and Bond, I think then we'll start to see historic numbers. But I am very excited about the end of the year slate. And I think it's also different this year because it's coming out of the backlog. Those films are sequenced much closer together. And IMAX typically only plays a film for a week or 2, and we'll have to pivot to maybe a second-tier movie in the middle. But for us, the back half of the year is a lot of top-tier movies. I didn't even mention, there's 2 other Marvel movies, Eternals and Shang Chi. There's also Venom from Sony. I mean, there's really a lot coming out.

Yes. It seems like -- and your comment around the slate being staffed, you were saying that, that's good or bad for you? Because I think you said it's -- you typically play things for a week and not -- they're 2 weeks apart? Is that what you were saying?

No. No, it's definitely good for us. We play things for either 1 week or 2 weeks. And then we'll have to go to sort of a secondary title until another blockbuster comes out. But now we have a blockbuster every week or 2. And if you look at IMAX's business model, I forget the exact number, but the vast majority of our revenues come from like 10 movies a year. And then almost all of it comes from 30 movies. So the fact that we can't play secondary titles, but instead, have to play a blockbuster movie goes straight into our wheelhouse.

Yes. I thought you were saying the opposite but that the 2 weeks was going to be problematic. And I was like, why would that be? It sounds like it's good for you.

No, sorry if it wasn't clear. [indiscernible].

So when do you expect to see 2019 attendance in your theaters? Do you think that's going to take a little while? Do you think it's going to be at the end of the year?

Again, I don't mean to be rude, but I have to emphasize, we're not a North American exhibitor. So I don't sit around like everybody else, like waiting for North America to deliver. Like, my numbers around the world are very good, and they're incredibly strong. And the Middle East is in certain ways back to 2019. And as I said before, China is beating 2019. And my per screen averages in Japan over the last 12 months were $1.6 million a theater, which beat 2019. So asking me when it's going to be back to normal on a global basis, I think it's going to be sooner rather than later. I'm not particularly fixated on North America, but it will probably be the third quarter, the fourth quarter next year, but for us a lot sooner.

Got it. So any concerns around the COVID production delays impacting your slate going forward?

The COVID what -- Meghan, sorry? Production delays.

The production delays?

No because so many movies that were delayed were just put in the queue for release in '21 and '22. So one example would be Jurassic World, which was originally scheduled for '21. So they delayed production, but now it's coming out in 2022. And same with F9, which comes out in a couple of weeks. So while the production was delayed, the theaters were closed. So our slate next year looks extremely strong. And I think -- it's hard for me to think of even blockbusters that were released during the pandemic that we missed out on. From IMAX's point of view, I don't really think it was anything.

So the window is such a hot topic. I know you touched on it earlier, but do you think that the day in date is having an impact on your business or it's not? It's sort of you're insulated from it just because of the premium experience?

Yes. I think we are largely insulated, Meghan, because, again, we'll see with F9, and we'll see with Black Widow, which we're opening soon. But I just don't see the at-home experiences competitive to IMAX. I don't and by the way, there's been a lot of data, some of it shared with me by the studios, that shows that the rating of the movie is much higher when people see it in IMAX. So the top 2 boxes generally means how much people like it and cinema score. And some of the studios have done tests. They've released movies to IMAX to regular theaters at kind of closed end streaming services. And when you compare the ratings, people -- they just subjectively rate the movie a lot higher in IMAX. So I think the fans are going to want to come out and they're going to come out, and it's not really going to affect IMAX very much and I'd be very surprised to see that it does. I do think that it does have some impact on traditional exhibitors because, obviously, we play things for 1 or 2 weeks. Things hold over a lot more in the cinema. So I think you could see -- in the conventional cinema, you could see some impact there. But I do think that's a temporary phenomenon. I think when the pandemic happened, every company in our business went into kind of like a triage mode. And if you are the Walt Disney company and your cruise ships are gone, and you don't have theatrical exhibition open and your theme parks are closed, I mean, they did the best they could, and they released them online. It was the only touch point they had with the consumers, and I get that. I think it made a lot of sense. But if you look at what's happened since then, so Warner has said next year, there's a 45-day window around all of their theatrical movies. Disney has said for later this year, there are 45-day windows. Universal really has a longer streaming window, at least a 31-day PVOD window for blockbusters. Paramount, Sony, 45-day windows. So I think that was a temporary measure, which is going to go away. Now this -- your next question might be what about the 45-day window rather than used to be closer to 90 days. And for IMAX, that's pretty much irrelevant because we never really play things, with few exceptions, more than 2 weeks.

Yes. I mean, you just seem to be playing your own game. It seems like you're in a different sort of lane than the rest of them. So it's definitely a better place to be, in my opinion. So let's switch over to your [indiscernible].

Sorry, Meghan, just to add to that point, I also think from the studios' point of view, helping create an event around the launch increases the value of the content across the value chain. So in the old days, there was theatrical, electronic sell-through, streaming, television, airlines. By trying to put more of the streaming services in a shorter period of time, you really want to enhance the perception of that content when it's launched. And IMAX is somewhat of a curator of global blockbusters. If you want to create a global event on a release and you want to create global buzz, IMAX is really a good way to do that. So we've seen the studios doubling down on IMAX in certain ways. And one interesting example I could give you is that Universal announced last week that during the release of F9, they're going to have an exclusive trailer for Jurassic World only in IMAX. And I think that's a way to create some advanced buzz around that. I think that's one small example, but I think the shorter windows are going to prove to the benefit of IMAX.

Yes. That's interesting because it's sort of -- the biggest moviegoers are going to want to see at an IMAX to get to see that exclusive content. So that's pretty interesting. And I get the ticket price uplift, the bigger box. It's an interesting strategy. So let's switch over to your footprint growth because what is the ultimate addressable market for IMAX?

So right now, we're in about 1,700, 1,600, somewhere in there, markets. And we -- what we do is every 3 years, we look at our total addressable market, and we update it. And that changes because just to give you an example, in Japan, we had very few theaters, but it's one of the leading film-going markets in the world. So right now, I think we have something like 35-ish open but our addressable market there is closer to 100. So we think our addressable market is like 3,300 in the next couple of years. So I think -- that doesn't mean we're going to do it, but we think there's a market out there that's about twice where we are today. But one of the beauties of IMAX is if you look at China, when we started looking at China as a market, we said our TAM was 90 theaters, and we have 700 open today. And our target is closer to 1,200 because as you build out the brand and as you build out the recognition of the premium moviegoing experience or more people who want to go, so it increases your market size.

And how are your installs going? Weren't they sort of paused during COVID? Is that all back up and running?

No. If you ask me the most incredible question, like what was the one fact that surprised me the most about 2020, I don't remember the exact number, but I think we had somewhere in the 70, 80 range of installs. So you think of -- during a pandemic, where the world is closed, that many new theaters were installed. So it tells you something about our customers' commitment to IMAX. As a matter of fact, last year, we had a similar number of signings, meaning during the pandemic, they're closed, they have no cash flow, but they're signing up for -- -- well, some of them have none, but the international ones obviously had cash flow. They sign up for more IMAX theaters. And when I told my Board that, they kind of did a double take because I think they would have had the same impression you did, like who would be signing on for new commitments and opening theaters. But I think our clients recognize that we are part of the moviegoing future. And if you're going to reinvest in your business, this is where you want to reinvest.

So I want to touch on the health of the industry because the domestic market, you have a lot of partners all over the world. But how do you feel about the health of the movie theater industry? Because AMC, your biggest partner, I guess, today, feel a little bit better about them than you did maybe 8 months ago. But what -- how are you feeling about your partner strength?

Well, I always -- for the record, I always had faith in Adam Aron. He's an incredibly resourceful guy, and I learned a long time ago not to bet against him. But certainly, I do feel better than I did a couple of months ago. This isn't something we talk about a lot, but we've been a very good beneficiary of what's gone on with AMC's capital raise because we have about 100 theaters in backlog with AMC, which means theaters that are scheduled to be open in the next couple of years. So obviously, the fact that they have $1.7 billion in cash and could implement their plans going forward is a very good thing for IMAX. Also, you must have read AMC's comments that they may acquire some other theaters. And we've been discussing new opportunities with them in other places, whether it's in Saudi Arabia we will partner with them or in Odeon or in the United States. Also the previous majority owner of AMC, Wanda, more or less cashed out of their whole position. Wanda is our biggest partner in the world. So Wanda getting that liquidity and being able to raise that capital is a really good thing for us also. Beyond AMC, the other major operators in North America recapitalized, whether it's Cineplex, Cinemark, Regal, the whole world, that's obviously a good thing. And globally, we really haven't seen a lot of bankruptcies or financial distress. We're in pretty good shape.

That's good to hear. So what is the ultimate value proposition you represent to the ecosystem, I mean, to all of your different partners? And how do you make sure that the best and brightest filmmakers understand that they need to shoot in IMAX cameras?

So we are essential to the blockbuster ecosystem. So over the last several years, a much higher percentage of the box office has been based on blockbusters. And IMAX in a way has become the global curator for that. So when people want to go to a blockbuster movie, they see what's playing in IMAX. So -- and all the movies that might come out in any given weekend, the IMAX release kind of says to the consumer, this is a special kind of movie that I'm going to want to see. Also because we're in 84 countries, we have the unique ability to launch a franchise, whether it's in Hong Kong or it's in Bangkok or whether it's in Seoul or whether it's in France somewhere on a global basis. And these things are based on heat and image and all kinds of things like that. So we're extremely important to that and important to marketing that. Also, as you said before, we command a significantly higher ticket price. So the studios would rather someone pay 30% more for it, that helps their initial box office. In terms of the filmmakers, it's one of those things. I don't want to overstate it, I want to try and be humble about it, but the filmmakers really approach us about releasing their movies in IMAX. So the most -- a kind of famous partner of ours is Chris Nolan, who does every one of his number of recent movies over the last probably 5 or 10 years with IMAX and with IMAX cameras. And there tend to be a lot of the best filmmakers in the world who do that. So again, this year coming up, the Bond film, No Time to Die, Cary Fukunaga filmed that with IMAX cameras. And he said to me -- after the experience, he said, "You know after flying first class, it's hard to go back to coach again." And there's other blockbuster movies. Maverick was filmed with IMAX cameras. Some of the Marvel movies, including Black Widow, have IMAX aspect ratio in them. IMAX is much more horizontal than letter box like a traditional theater. So we've been fairly aggressive. And we've used in our camera program a way to make IMAX easier to shoot with, special lenses that work with more traditional cameras. So I'm happy to say that's an effort that's had a lot of traction and there's a lot of people now who want to film the IMAX cameras more and more.

You reminded me of a question I had when you brought up Christopher Nolan because how do you feel about Discovery taking over at Warner Bros?

I feel good about it. I mean, I think Discovery is a well run network. In full disclosure, David Zaslav is one of my close personal friends, so I know a lot about how he approaches things. And I think he's going to create a Warner Bros that's more in line with what its history is, talent friendly, theatrical friendly. I don't pretend to speak for David, he could do a great job of that for himself. But I think he's going to add a lot of luster that in the last couple of years has suffered somewhat, and bring Warner back to its glory days.

Well, I hope so. It's definitely been an interesting sort of announcement and he certainly was talking a lot about the creatives and the talent in the announcement, which had me thinking that Christopher Nolan being so upset about the day and date announcement might have had a little bit to do with his tact when he was talking about the merger. So it's...

By the way, I mean, as I said, I talk to David frequently, and David wouldn't say it if he didn't believe it. So I don't think he said it just because of messaging, I think that's what he thinks.

Yes. No, he's very, very, very talent friendly. So we like the deal. So anyway, I appreciate your time here, Rich, and thanks for coming. I think we're out of time.

Thank you, Meghan. I appreciate it very much.