IMAX Corporation (IMAX) Earnings Call Transcript & Summary

Good afternoon. Welcome back, everyone. I am Jessica Reif Ehrlich, the senior media and entertainment analyst at BofA Securities. And I'm thrilled to have the CEO of IMAX with us today, Rich Gelfond. Welcome, Rich. Welcome back to the conference. Great to see you.

Thanks, Jess. Happy to be here as always.

Got it. So there's a lot to talk about today [ with what's going on ]. Disney's recent release of Shang-Chi was uniquely successful, breaking pre-COVID records, they had a good follow-up weekend. And as a result, it's -- Disney now appears to be following Warner Bros.' footsteps in reversing [indiscernible] Of course, they've now announced that they're putting all their films in the theatrical window for the balance of this year. Do you think this is a major turning point in the effort to reopen theaters?

I definitely think the turning point -- that was a turning point even before Disney made its announcement on Friday. I mean there's a lot of data out there that showed how important a theatrical window was. And it was almost unanimous. I mean when Warner had its day-and-date release strategy and others didn't, you looked at very dramatic drops between Friday, Saturday, Sunday on opening weekends and you look at drops from weekend to weekend that were way down. We did a lot of research into piracy and putting a perfect copy on the Internet shockingly did not -- there was a lot of piracy that followed that. So as a result, we felt it wasn't an economic proposition for the studios to take this high-priced content and basically give it away for free through piracy and destroy their own box office. So the data has been so uniform on that. And so I wasn't that surprised. I was really happy to see that Disney did what they said they were going to do, which was look at the data and make a determination. And once they saw the data, it wasn't just Shang-Chi. They had also a very compelling data around Free Guy, which was released a few days before that and they couldn't deny the data. But it's not just that that's made me optimistic, not just Disney's change in policy, not just the box office, it's a number of other things that have happened. So after the Shang-Chi results, Sony actually moved them up by 3 weeks from late October to the first week in October. Bond's reiterated that it was reopening around October 8 and that happened. Just the entire industry look different around that time. And other studios, as you know, have abandoned their day-and-date strategies. So for the first time since this all started, I think the pendulum has really swung. I think as we look in the next couple of months going forward, it's very close to normal and I'm really excited about that. It's been like a game of Chutes and Ladders. And every time we've come close in that game to winning, we've hit a chute and gone back down. But I think we're -- if there's no other surprises on the health front, I think we're there.

Right. Just so you know, Tony Vinciquerra also mentioned piracy as a big issue, totally in agreement with you. And it's kind of crazy what's going on with release schedules this year. But having said that, we're at a point where it actually seems pretty positive. What is your outlook for the remainder of the year in 2022 in terms of box office? Will we have like a humongous onslaught of releases from here?

Yes, I think for the remainder of this year, I mean, at least for IMAX, if you go through our schedule, it goes from Venom to Bond to Dune to Eternals, Marvel movie. Then from Eternals, it goes to Ghostbusters. After Ghostbusters, Spiderman, a number of other films. So that's as good an end of the year as we -- I can't remember a year that's been that packed. And then when you look into '22, you've got Jurassic World, you have Top Gun, which is postponed from this year. You have 3 or 4 Marvel movies coming. You have Avatar at the end of the year. There's just -- it's sort of an [indiscernible] how many movies there are. So I feel really good about it. And I think for traditional exhibition, one of the questions is going to be, how do you sell all that stuff? I think for IMAX, because our windows are typically 1 or 2 weeks, we are going to be able to show it. And as I've been thinking about it, I think 2022 looks incredible. And again, I'll say it for the last time [indiscernible] just assuming health issues don't deteriorate, I feel really good about the remainder of this year. And as you know, we have a big international presence, including in China, and there's a Chinese national holiday that starts October 1 and [indiscernible] releases coming out then. And then it's my understanding that Bond and Dune have been accepted into China. So I just think there's a lot of good news right now.

So with the slates or the release schedule ramping up, there is 1 studio that has delayed their releases -- the actual releases into 2022, and that's Paramount. Do you think there's any chance that Paramount could reverse that decision?

I really don't, Jessica. I spent a lot of time close to a lot of the decision-makers at Paramount, and I think in Top Gun, they think they have something very special. Tom Cruise waited more than 35 years to make that movie. I actually saw that movie. It's an amazing accomplishment. And I think they just feel that for that franchise and with that kind of quality, they want to make sure the box office is 100%. So I mean, it's so good as a matter of fact, I tried to urge them because I think whatever issues are there, people would flock see that movie. But I think they just want perfect conditions around it. So as much as I wish it was otherwise, I don't think so. Now for IMAX, it turns out because we can only play 1 movie at a time, we're a single screen with different exhibitors, and because Top Gun moved, we can now play Ghostbusters, which we weren't able to play before because they conflicted. So a lot of the box office that we would have gotten from top Gun will get there, and then we'll get the Top Gun box office next year. Also because of the recent developments, as I said, [ they have ] moved up, and we expect to have that move up. So I think between the combination of those things, the fact that Top Gun moved, while it's personally disappointing because I think it's an amazing movie, it's not going to be very negative for us, and I think it's going to be a tremendous positive in 2022.

And with Disney's announcement on Friday, which I think is hugely positive, does that signal the end of all this studio maneuvering for the rest of this year?

I think it does. And I should also say that I read your report this morning that you guys put together. And I think you're really prescient in assembling the data before all the studios have assembled the data. And the data is so clear that for blockbuster films, it makes no sense to put them on the concurrent distribution pattern. The economics just don't work, and you show that very clearly in your report. So I think there's very little risk of things moving to streaming services. Now when there's some small movies that IMAX typically wouldn't play move to PVOD for a period of time or they stream them or they delay them, I don't think that's very likely to happen. But at least I know for the kinds of movies that IMAX does, I'm very confident that this schedule is pretty set right now. The other night I was so happy I was watching the U.S. Open and there was a commercial with Daniel Craig for Heineken. And he was drinking it. Obviously, he plays Bond. And at the end, they said, see it in theaters in early October exclusively. And I was in a place where I was like high-fiving people, who must have thought I was nuts because it was just a Heineken commercial. But we've all been conditioned to so many things moving, but I don't think they would [ pull -- ] or launch their TV ads and go that aggressive if they weren't [indiscernible] So yes, I think it's pretty locked in.

And then conversely, you have a movie like Dune, which is just so high profile and I think big expectations, but it will be day-and-date with [indiscernible] How much does that hurt the box office?

That's a really complicated answer. I think it will hurt the general box office. I don't know how much and it will hurt IMAX because it's such a special movie. I don't know if you read the review in the New York Post this weekend, but -- coming out of the Toronto Film Festival. But the reviewers said that he thought it was better visually than Avatar or Avengers or almost every movie he's seen. And he sort of went through it and said, you have to see it in IMAX. And then he reiterated, I'm getting it wrong, but I'll get to the point. He said, "Don't see it in HBO Max, see it in IMAX." So Denis Villeneuve, the director at both the Vienna Film Festival and TIFF where the reaction was overwhelming, has just gone -- [ pounded the table ] about seeing it in IMAX. And I just read a review, an article in Deadline, where he's talked about how he made the film prime action and how he thought about it in IMAX, and that's how he wants audiences to see it. So I suspect we'll get disproportionate market share, and we'll do really well in that movie. And in some markets, including China, I think it will open a little earlier. So the piracy won't have as big an impact. But I think in terms of the general market, I mean, that's one. It's really a shame that that's day-and-date release because if ever there was a theatrical kind of movie and a movie that begged to be seen in theaters, it's Dune. But I understand that WarnerMedia had committed to that strategy at the beginning of the year, and they felt it was too late to do anything about it. But I think if people who understand the filming elements will still come out and they'll come out in IMAX, but I think people who don't will watch it on the streaming service. And unfortunately, I think they'll miss a lot of what the experience is.

Right. Are you concerned that the 2022 film slate will be overcrowded? Or do you just believe that pent-up demand will create enough appetite to absorb what's an unusually crowded slate in normal times?

I think because of IMAX's business model, I'm not that concerned. I don't have to [ build a 24 plex ], and we show movies for 1 or 2 weeks at a time. So I think if you look at how the slate has fallen out, this tremendous content in 2022. But it's -- as of now, it's all pretty spaced out. It's spaced out, the 1 week apart, 2 weeks apart. So I don't -- not only do I think it's a negative, but I think they don't really get people in the habit of going to IMAX. But when they go to IMAX, they'll see the trailers for -- to the other films. So for example, when they're at a film like Jurassic World, they'll see Top Gun, they'll see Avatar. So I think it will create an IMAX want to go and repetitive business at that point. For conventional cinema, in a way, it's a shame that all these -- all this gold isn't spread out over a longer period of time. But even now with the modern business where there are multiplexes, it may affect the box office on a per film basis a little bit. But I think, in general, it will really bode well for the industry overall because there are so many good things out.

On your second quarter call, you highlighted that 90% of IMAX's network was open. Do you believe there's any risk of forced closures returning?

I hope this isn't wishful thinking. But I think we're in different days of the worldwide pandemic. I think lockdowns and government regulation is going to be less going forward. And I think it's much more how do we live with COVID. We've seen it in a lot of other businesses, look at the sports business and whether that's been vaccine-mandated or whether it's been wearing masks and some rock concerts are starting to come back. And as you know, restaurants are back somewhat vaccinated, somewhat outdoors. So I think the society has really adapted to not how do we lock everyone out, but what kind of workarounds that make people feel safe are there out there. So I don't think there's a great danger of significant theater shutdowns going forward. You may remember about a month ago, in China, they had a few flare-ups of the Delta variant in some areas. And we have about 750 theaters there. I think at the maximum part of that problem, about 75 have been -- were closed. But now in all of China, only 4 theaters are closed. So we're virtually 100%. So again, I just -- I don't see that as an issue. And if you need some empirical proof as well, you look at the Shang-Chi numbers. For the opening of Labor Day weekend, it did over $90 million, which was almost triple what the best film at any time had ever done over a Labor Day weekend. And of this weekend, which was the second weekend of Shang-Chi, it was the second -- it was the best second weekend for any movie since the pandemic started. So it's not only the theaters being open, but it's the films being released the right way and the public getting comfortable with going, whether it's because they're vaccinated or they have masks. And when you put all of that together, I think the chances are very small of there being a massive shutdown.

Right. And what still needs to happen to open up the rest of your theaters? And where are those theaters?

I don't know, Jess. I used to get a report that tracked openings and shutdowns and things like that, but it's so minimal right now. I think it's places like that wouldn't surprise you like places in Lat Am or maybe in India, but it's very small at this point. And it's kind of a rounding error.

Okay. And then enabled by new distribution methods and models and compelled by the pandemic, studios have experimented more than ever with windowing strategies in '21. And after all of this experimentation, it feels like the industry is coalescing around the 45-day exclusive theatrical window. Does that new window, that's the window that -- Sony said 45 to 60 days, but everybody else seems to be coalescing around at 45. Does that impact you at all? How does that impact IMAX?

I actually think in some ways, it's positive for us that it's a smaller window. As I said a few minutes ago, we only play films for 1 to 2 weeks. So in an outlier case like Avengers, so we did 3 weeks. So the fact the window is 45 days instead of 90 days is irrelevant to us in terms of an attendance point of view. From the studio's point of view, though, I think one reason they've always liked IMAX is that we create an event around our release. So when something is in IMAX, it feels very special and a lot of studios will even go farther and shoot with IMAX cameras. So Bond was shot with IMAX cameras. Dune was shot with IMAX cameras. And the studios do that not just because of the visual experience, but the directors want to do it. It looks better to audiences. When people rate movies on the opening weekend of CinemaScore, seen in IMAX elicits a much higher CinemaScore. So if you were a studio that had a 45-day window or you were a director, and then the back end instead of having to wait longer, but you wanted to really create value for that content, you would invest really heavily in the beginning of that content. And almost you think of the launch of the movie even more as a trailer for the content chain. And that is the way the studios think about it. And since the shorter windows, I would say there's been even more demand for IMAX and part of places which have been more reopened than North America, like in Asia, our indexing was significantly higher, meaning our market share went up this year. And I think it's because also people who can stream it, if they're going to go out and they're going to see it in a theater, they really want something special. And I can't tell you how many people have said that to us. I didn't go to IMAX, but after sitting on my couch, I wanted to go to IMAX now and see it in the way the filmmaker intended it to be made. So I think there's going to be more marketing [ played ] to the IMAX release. I think audiences will seek out premium more, again, reading your report that came out this morning. I think you came to the same conclusion that if consumers want to go out and see something special and not on their couch, that IMAX is going to be a beneficiary of that. So although I hate to get into the exhibitors some disputes with the studios as to what the right windowing is, I think the 45-day window works really well for IMAX.

Right. And I mean do you think that 2022 will be a year of stable release strategies and windows? Or do you think that the studios will continue to experiment even next year?

Well, again, they might experiment with the smaller movies, but for the blockbusters, I don't see it. I mean Disney said that their release pattern in '21 was an experiment. And then after the experiment with Free Guy and Shang-Chi, they said we're releasing every movie for the remainder of the year with a theatrical window. So I think that they saw the results of that experiment. And Warner Brothers, the same thing. The first Wonder Woman did over $800 million. And the second Wonder Woman, which didn't have theatrical windows did in the mid -- between $100 and $200 million. I don't remember exactly the right number. And then I'd also go to creating franchises, merchandising, theme park rides, all kinds of things like that. You look at F9, which opened with a theatrical window in April or -- I think it was April, which is a worst part of the pandemic, did around $700 million worldwide, and they still have their streaming rights. And they still have their home DVD ability to sell there. And they still have electronic sell-through. And they still have airplane rights. So it's a model that just didn't make a lot of sense, especially for blockbuster properties. So I can't fathom a reason why they would go back to that.

Right. Do you think it's possible to create an event or film franchise through a solely streaming strategy? Is that even possible? And maybe just to continue, do you even think a hybrid strategy where you have theatrical and streaming, do you -- can that create enough buzz?

You never say never, Jess, because there's so many changes in life and in people and patterns. But one of my favorite conversations when I go out to L.A. and I meet with the press, and there, the press is always kind of biased towards disruption because they find it interesting and intriguing. So I always turn it around by saying, how are your 3 favorite streaming movies of the last year? And I don't think I've met anyone, maybe just one, who can name 1 streaming movie, but they just don't create franchises, I think -- theatrical franchises. I think that they've done a really good job in episodic television and with Stranger Things or The Crown or whatever it is. They've obviously built a fantastic business and developed brands that work. But I think movies are cultural events and I think they're dining room table talk. And just look at the difference when Shang-Chi came out. So many people have told me, did you see it? My kids are going to go back and see it again. I think that will lead to sequels. I think it will lead to maybe TV spin-offs. It will certainly lead to more merchandising. I just don't see any of that happening in the streaming world but in theatrical release. And by the way, you can ask me this, but it's a sign. I haven't seen evidence yet that the number of subscribers or the retention rate goes up because of movies without theatrical windows. As a matter of fact, if you go back to the early days of HBO and Netflix, they built their franchises based on movies that have been seen in theaters and had built a brand around them, and then they were sold off to the streaming services and people pay monthly fees to see those things. And then they were really clever and using that same theory for episodic TV. And even if you look at some of the successful shows on sort of the streaming service, like The Mandalorian which is fantastic. I love it, I can't wait to launch it. But that came from Star Wars, which is a multibillion-dollar franchise over many, many years. So the other aspect of this is do the streaming services create some kind of windows eventually because they noticed that, that creates value to the property, creates a franchise and makes it even more valuable. And I think that kind of scenario was hard to see years ago, and that was a pillar of Netflix' strategy. But at that time, the windows were much longer than 90 days. But as the windows now go down to 45 days, I could see the streamers adapting by saying for certain expensive franchise properties, they're going to do a window. And it's my impression that Apple is working with Scorsese on a DiCaprio movie that is intended to have a theatrical window around it. So I actually think the streamers may be learning from this experience, that not only is it difficult to build brands, but maybe they should emulate the theatrical window to increase the value.

Right. So how do you think about the positioning of IMAX in the overall landscape in an eventual -- hopefully, an eventual post-COVID world? And maybe you can talk about what makes IMAX different from traditional theaters?

Well, how many hours do we have left, Jess? I'm trying to do it in a few minutes. But IMAX is not a movie experience. It's an immersive experience. You feel like you're in the movie. You feel like you've been transported. The world's best directors, whether it's by way of example, Jim Cameron, Chris Nolan, J.J. Abrams, Denis Villeneuve, they want to paint on the most immersive canvas in the world. And they either shoot with our cameras or they use our technology to [ operate ] it in a way that makes it incredibly special. And we can command a higher ticket price. So that means the studios make more money when there's an IMAX release. The exhibitors make more money when there's an IMAX release. We make money when there's an IMAX release. So it's not like we're cannibalizing anybody else's market. It's because of the premium price, we're enabling other people to make more money. Audiences clearly want to see it in IMAX. And as I mentioned, in some countries that are further along in the post-COVID world, the indexing has been extraordinary. So in China, the last 3 weeks where we've shown Free Guy, we've done about 14% of the overall Chinese box office on 1% of the screens. A few months ago, Jim Cameron, re-released Avatar in China, and on 1% of the screens, we get 30% of the box office. So clearly, the audience demand is there. And as I said, the economics work for the exhibitors, and they work for the studios on a global basis. So when you have the economics working, when you provide a much better experience, when you have the filmmakers who like it, when you have the audiences who like it, I think you have a lot of wind at your back, but IMAX has always been reluctant to rest on its laurels. So we're always trying to innovate. So we have a new generation sound system that we've put in the last few years. We put in a laser system to get sharper images and more contrast, higher resolution. We're always saying, like in order to go forward, you just can't rest on your laurels and have to go forward. So I think there's just too much to offer for -- to too many constituencies for us to be easily dislodged.

Right. And then maybe talking about the rest of the world a little bit, but you generate about [ about 2x ] revenue from markets outside of North America, how much runway is left for growth in international markets? And what makes them so attractive right now?

So we have about 1,600, 1,700 theaters open in the world. We've addressed 3,300 potential locations. But when we address that, that's over the next 3 years or so. So to give you an example, when we first went into China, we addressed -- we said the market was 90 locations. We now have 750 open and about another 250 in backlog. So when you get in them, you understand them better. So Japan was the market that we have 39 theaters in now, but our target is 100. But it's the third largest film market in the world. So once we get to 100, I'm sure we'll reestimate and our 3,300 will go off at that point. So there's a huge addressable market globally. So much of it is international because that's more underpenetrated than North America. So markets like the Middle East are growing really rapidly, as I mentioned, Japan, China. Even Western Europe, we're quite underpenetrated. Years after that, maybe a place like India has shown encouraging signs pre-pandemic. Lat Am was starting to get some traction. And it's funny, outside the U.S., in certain ways, our brand is more well known than it is in the U.S. And in China, when I say from IMAX, they believe there are 2 ways to see a movie, a regular way and IMAX because we came in so early in the development there. And then I think in other places in the world, like Western Europe, it's taken longer because it's been an existing infrastructure. But I think the economics work so well for the brand. And I think especially for the reasons we spent much of our time talking about this session post pandemic and shorter windows and things like that will remain an attractive proposition on a global basis.

Right. So just to stay with China for a second, but for a variety of reasons this year, local language films performed extremely well in that market. Do you think that local language films will continue to grow in parts of China? And then maybe you could adjust that for our other markets. China seems to be a unique situation, but the first question is China and the second question is other parts of the world.

Yes, I do, Jess. I think that will be an important part of our growth going forward. And I think, actually, the important part of worldwide cinemas growth. We had a strategy in place pre-pandemic to do more local language films. So if you look at the graph of the number of films we released in China, it's gone up quite consistently over the last number of years. Obviously, because of pandemic and there were no Western films being released for a long period of time, we had to lean harder even into that strategy. And last year, China was our biggest market in the world. And as a matter of fact, a film called The Eight Hundred, which was filmed with IMAX cameras, became the #1 film in the world. So both what was happening anyway and increased by the pandemic, what's happening is there are more genres of local language film in China. So there are science fiction whereas that was hard to find. Action adventure, romantic comedy, more nationalistic films, all kinds of films. And because the box office has grown so much there, there's more money available to invest in films. So when you model it out, you can realize [ your ultimates ] on more expensive films and more expensive films generally mean IMAX films, better special effects, better talent, using our cameras. So that strategy has been pushed forward in a way, it's not a great analogy. But you can use as an example by technology in the U.S. whereas it was on a path to increase, the pandemic accelerated that. And that's the way I would think of local language film in China, we were getting there, but we're getting there much faster. In terms of other countries, in Japan, we've been very successful with local language film. We had a 5-picture deal with Toho, and we have a new deal with Toho. And this 1 statistic is really incredible, which is during the pandemic and Japan highly vaccinated, the #1 movie of all time came out in Japan called Demon Slayer, and it was also the #1 IMAX movie ever in Japan. And then we showed it in a lot of other territories, including in the United States, where it did quite well. And the rest of that slate did well. And we've done to local language films in Russia. We've done them in Korea. We've done them in France. I'm sure I'm forgetting a lot of other territories. But I think it's a really good business. And I think as audience has become more sophisticated on a worldwide basis, you marry that sophistication and the more genres with our brand, I think you should have a very good business.

How do you think about IMAX's share of local language films over time? [ Are you ] more Hollywood or can you participate in the growth of local language films? It sounds like you will, but...

Yes. I think it depends on the country. So I think in China and Japan, we'll probably have a greater percentage of local language films. Well, we almost certainly will than we do today. And another reason I didn't give you on the last answer was that China's -- because of the different demographics of the different cities, and I think we're in like over 100 cities in China, they have different tastes even. So some of them might not have the taste to see our Avengers managers like most of the country would. So I think as part of our programming, we'll supplement in local language in parts. I think, again, as I said, Japan, it's been so phenomenally successful. I think there are other territories that are more dependent on Western films and that really like Western films and other territories also don't produce the kind of local content that's conducive for IMAX release. So I think that in those areas, probably the ratios won't change much.

Right. We don't have a lot of time, I have like with 50 more questions. So I just -- I guess I'll just kind of try to wrap up in saying, how much do you think consumer behavior will change because of the pandemic? Can you put the genie back in the bottle? Do you think we'll ever get back to kind of 2019 attendance and box office revenue levels? Is that doable?

So first, let me answer that for IMAX. We did over $1 billion in box office in 2019. IMAX China has been doing better than that with local language films as Japan. You look at the slate, like in '22. And in my mind, there's no question that IMAX can do better, and we have a larger network. We keep growing our network and things like more marketing and windows. So I think there's very little doubt we can. In terms of the overall industry, there are a lot of different changes taking place. There's consolidation, there's globalization, there's growth in certain markets and contraction in other markets. There is lower and mid-level movies that will go to streaming altogether or that will go sooner than they did before. So it's really complex. And there's a lot of crosswinds going on there. So I'm not sure, I would think so. I mean, when I look at the slate going forward, I'm pretty optimistic for everybody, but I'm just not as sure as I am about for IMAX.

Right. I mean, Rich, [ I could talk to you ] all day. but thank you so much for your time and your insights were incredible. And for everyone else, we'll start again at 4:10 with Lionsgate. Thank you.

Thanks, Jessica. Appreciate it.