IMAX Corporation (IMAX) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Meghan Durkin. I'm the Theaters Analyst at Credit Suisse. I'm pleased to introduce our final session of the day is with Rich Gelfond, the CEO of IMAX. Thanks for being here, Rich. I can't hear you. You're on mute.

Does that work now?

Better. Got it.

Thank you, Meg. I was just going to say with me today are Natasha Fernandez, our CFO; and Heather Anthony, our Interim Head of Investor Relations.

Okay. Great. So Rich, hard to believe, but it's our third virtual conference since the pandemic hit. But at least this time, we have some encouraging results of the domestic theaters to talk about. So how is IMAX's domestic box office performance to date in 2Q?

Well, again, we don't really think of our company as domestic because we're not an exhibitor, Meghan, as you know. We're in 88 countries and more than 50% of our box office is global, Our domestic has been great. But more importantly, our box-office has really come back strongly in the second quarter. As you know, we've been profitable for the last 6 quarters, positive EBITDA and free cash flow. In May, we had a better May than we had in 2019, which is 2019 record-level box-office. And in June, even though we're only partly [ antigen ], we've already beat in June of 2019. The last 3 movies in a row, Doctor Strange, Top Gun and Jurassic World all have the potential to get $2 billion and IMAX being an asset like model and that all flows through our financials in a very good way for us.

So the -- and those numbers, when you said your performance was above 2019, that's on global basis?

Yes. I mean domestic is 35% typically. So there's no reason for us to report domestic, but it's been very good, I mean.

So how does slate look from here? And do you have good visibility into the '23 slate because it's a lot of placeholders right now you might have better information.

Yes. I mean I think it looks very good for the rest of the year. We go from Jurassic World into Lightyear then we go into Minions then we go in to Thor and then after Thor is Nope with Jordan Peele's film with IMAX cameras. We have Bullet Train in the back end of the year. We have Black Panther 2, and then we have Avatar, of course, which we expect to be very large. As you may know, Avatar 1 was the biggest film in the history of IMAX. And what we know about this film, we're incredibly excited. And then when you look into next year, we've got, I think, 3 Marvel films, 2 DC films. We have Mission Impossible 7. I have my notes here because there's too many. We have Aquaman, one of the Marvel films is Guardians of the Galaxy, Fast 10, Dune, I mean, I could go on, but it's extremely strong.

Okay. So you talked about Nope having the IMAX DNA, is there anything else that you highlight as having been filmed with IMAX cameras. And can you give us some stats on how those films typically perform or skew towards new circuit?

Yes. If they're filmed with IMAX cameras or if they have other IMAX DNA, such as our proprietary aspect ratio or other things, they tend to over-index meaning a bigger percentage of box-office. So both Doctor Strange and Top Gun were filmed with IMAX cameras. On Top Gun, IMAX did 14% of the domestic box-office on less than 1% of the screens. Now we did roughly 10% of the global box-office. We were less penetrated in territories outside the U.S., which is why that's a little lower. Going forward, our DNA is in Thor. It's in Black Panther. It's in Nope, Jordan Peele used the IMAX film cameras, which is what Chris Nolan used when he shot the Dark Knight trilogy and a number of its other films. And I think this year, including in China, we have 10 films that have IMAX DNA in them. Dune was a really great example, which was filmed with IMAX cameras, where we did over 20% of the box-office less than 1% of screens. So that's been part of a concerted effort that we made in the last couple of years to introduce our DNA into the films when they're being shot.

You mentioned Avatar, so what would you say about that film in the 3D potential? I mean I feel like it's been forever since we've mentioned or talked about 3D. But how is that typically factor in on your screens?

As you know, 3D started with a lot of promise around the first Avatar. And at that time, we showed it exclusively in 3D, and we did $250 million on -- I don't remember the number, but it was less than 300 screens, which is a phenomenal result. We're very associated with it. This Avatar, my understanding, is going to be released in 2D and 3D, and it's going to be talked about in both ways. And I think we'll look at it on a market-by-market basis. So markets where people are very amenable to 3D, I think China being one of them by way of example. We'll play more 3D than we would in a market which is less open to that. But I think it's going to be interesting because the 3D in Avatar, as you may remember, was so amazing and it was made for 3D and Jim Cameron is making this one for 3D. So I think there's going to be a lot of decisions not just at IMAX, but by people in the exhibition business around the world the best way to show that film and also because there are 4 sequels coming. It's not a one-off, I think it's going to be an interesting question. For us, we're so excited about Avatar that we put together an Avatar task force internally, and we're really looking at ways to really take strategic advantage of that. So whether it's making sure the right kind of technologies in the field or working with Disney on the right kind of marketing campaign to go with it or just looking at all international territories to make sure we have the right staff. And we really tried to get in front of it so we can capitalize on it.

That's interesting. So blockbusters have obviously been doing good business, but all you've been hearing from the exhibitors today is that they need more content. Is that a concern at all from your perspective? Do you have enough content and consistency?

So IMAX is in the blockbuster business. As I said earlier, we're not an exhibitor. We're a technology license company. So we license our technology to companies around the world, and we're a single-screen technology. So our screens are generally reserved for the biggest and the most expensive and the most immersive films in any particular point in time. So there are enough blockbusters to really fill our theaters. We have visibility for the next 2 years. So if there are less smaller films released, it doesn't really have an impact on us. With that said, I think you will see a trend where there will be less smaller films released in general to exhibitors. But I do think now that the windowing has kind of settled around 45 days that the streaming services will start to make some of their blockbuster films available theatrically with a theatrical window around it. So again, for IMAX, I think that's all good news. And for the exhibition community, I think we have to see how that sorts out.

Yes, for sure. I think that is probably right, they need more revenue streams. At the same time, you're working on alternative content, is that right? Can you talk about things you're doing in that space?

Sure. So we're in the process of wiring IMAX theaters on a global basis. We now have 75 wired, and we expect to increase that significantly for the rest of the year and into next year. And the idea is what makes IMAX so special is the experience for audiences. So we're not going to take like, TV feeds or content that some exhibitors do and put it in our network. We're going to create proprietary content. So we've done a number of projects before, I'll just give you a couple of examples. One is we did a Kanye-Drake concert live, and we had Academy Award Nominated DP to film it, we used IMAX cameras to film it as well. And we have wider bandwidth and special boards bringing it into the theaters. So when you see it, it's a special IMAX experience. It's not a regular experience that's just being broadcast into the theaters. And it was amazing. People are jumping up and down in their chairs. They're slapping fine. It's almost better than being at a concert, we say everyone has a front row seat because Kanye is 6 stories high. He's not 3 inches high and you're watching it on a screen. Yes, you're watching on our screen, but it's a better, more immersive screen. Another example is something we've done is the Beatles on Disney+. As you know, Disney did that series. And at the end of the series, Peter Jackson remixed on the final rooftop concert. And we did a live Q&A with Peter Jackson from New Zealand. While we -- then we showed following that, the remastered Disney+ in IMAX and blown up and sunny clarity to the IMAX experience. And again, that one did $3 million for something that's run on a streaming service and the Kanye concert sold out in most of the theaters that we had on actually very short notice. So I think the areas we're going to look at music is an obvious live music. We're going to look at comedy. We're going to look at different kind of sports, including eSports, we're going to do live premiers. So actually, last week, I guess it was on Thursday night, when Jurassic World opened, we did a connected theater live event with the cast of Jurassic World and then we played the premier. So it's a way not only to create a separate revenue stream, but also to augment our existing revenue stream through special events and also to increased capacity utilization, as you know, like a church was built for Easter Sunday, a lot of IMAX theaters will go for big opening weekends, but that's not every day during the year. So this could help increase our per square -- our per screen averages and our capacity utilization.

Yes. That makes a lot of sense. And it sounds like there's been some really successful alternative events recently like the BTS stuff. So concerts make a lot of sense if people can't get to the city or there's always a movie theater nearby but...

Not a movie theater, an IMAX theater. As I said, it will look very different. In a movie theater, look like those all boxing matches that used to be televised. This looks like a live experience. Just like when you go to Top Gun, it's very different than seeing it in a regular theater. It will be that kind of difference.

Yes. Forgive me for that. Theaters in the past have been a very recession-resistant category, why is that the case? And would there be any reason to think that wouldn't be the case in the future?

So I think, in general, theatrical entertainment is fairly low priced compared to other things. So if the economy goes into a downturn, you might cancel your vacation, you might cancel an expensive concert, you might cancel broadway, you might not go to a restaurant. But ticket prices for movies tend to be relatively low compared to other things. And it's a very immersive kind of statement form of entertainment. It feels like you went away, but then you have to get on an airplane in a hotel room and meals and things like that. In the last 7 recessions, box-office has gone up year-over-year in every one of them. And in the last really bad recession, 2008, 2009, there was a significant uptick in box office. So again, I think if anything, and I haven't done a study on this, Meghan, but my guess is the gap between sports tickets, concert tickets, travel and theater tickets has gotten even wider and it's become even more affordable on a relative basis. So I have every reason to believe that, that will hold up in that environment. And again, because we're in 87 countries, we've seen upticks and downturns in a lot of countries. So we have a lot of data, and we really haven't seen it. It correlates much more highly to the content that comes out and the marketing campaign than it does to outside economic conditions.

Yes, that makes sense. There's not as much content being released today. So it's just is potentially a concern if we do head into a recession here. I wanted to ask about...

I mean, sorry to interrupt, but right now, we've had between Doctor Strange, Top Gun and Jurassic World, 3 $25 million opening weekends in a row, which IMAX has never had in its history. And again, 3 movies that could approach $1 billion in a row. So to the extent any of that would have any impact now, it certainly doesn't appear to be having one.

That makes sense. The premium ticket price on IMAX, is that a risk that consumers start to trade down and bypass through screens if they're strap for cash and inflation is obviously a concern?

I still think it's relatively inexpensive, as I said in the last one. But also remember, as I said, we're 1% of the screens and somewhere between 9% and 20% of the box office, depending on it. So certainly, there could be some people who would bypass it. But the degree of our market share and the degree of our indexing is so high, I don't think it will be meaningful.

Let's shift gears to international. Can you update us on what's going on in China? Jurassic World had a great opening there. And then what about the rest of the world? How are other markets performing?

Well, I think they've all been pretty strong. Obviously, it's hard to get close to that $1 billion number just domestically, but there are 3 films chasing that right now. I think in China, as you know, there are a bit these rolling lockdowns. And if you went back about 2 or 3 months ago, only 50% of our screens were opened. Now it's about 93% of our screens. So we're starting to get through that in a fairly big way. Places like Japan and Korea have done very well even during the pandemic, you look at some of the results coming out of Western Europe now. LatAm, I think, did extremely well for Jurassic World. There are obviously growth markets like the Middle East, which have been coming back fairly strong. So it's been pretty much a worldwide phenomenon. I think it comes back to people who are locked in their homes for a long time. It's not just in the movie business and other movies, they're anxious to get out. They're anxious for cultural, social experiences. And I think we're seeing that pent-up demand play itself out globally. And the good news, which I answered in your first question was there's lots of content to keep them coming out of their house.

Yes. I mean it does -- is there anything to talk about on the local side, local content coming from other markets to the U.S.? That's been a big story the last few years.

We always look for a silver lining to a bad situation and the silver lining to the pandemic and the Hollywood shutdown was it forced us to look at more local language films. So if I ask you a trivia question in 2020 and '21, what was the biggest movie in the year in the world for that year. In '20, it was Detective Chinatown 2 and in '21, it was Wandering Earth. And by the way, those were both filmed with IMAX cameras, and they were both filmed in China. So our local language strategy really got a lot of traction. I don't remember exactly the number, but I think in China last year, we got close to $200 million in local language movies just in China. We just did a movie in France about the fire at Notre-Dame Cathedral. We -- just this past weekend, we released Dragon Ball in Japan. And in India, we released 2 of the highest grossing films of the year in the Indian market. So that's become a bigger and bigger part of our business. And when we're in the U.S., we're a little bit myopic. We forget that other cultures like different kinds of movies, and I think that's an enduring thing that's going to come out of the pandemic for us is we'll be able to program not just the Hollywood blockbusters, but also the local language blockbusters as well as the line, which we just discussed. And for example, in China, we have our film that's supposed to do extremely well, a big blockbuster called Mozart in Space coming out on July 15. So again, that mitigates some of the issues about play schedules and films getting into the markets. And by the way, a lot of these international local films play in other countries as well. So historically, Dragon Ball from Japan does more than 50% of its business outside of Japan and the Indian movies we did had really big box office in the Middle East. So it's not just that one country you do, it helps your global network.

Yes. I mean, it's -- certainly, it's starting here. I mean Anime has become really big here with young people, for sure. My son is nonstop with Anime content lately. So I wanted to ask about the health of your partners, I think Wanda is your biggest partner globally and then AMC domestically. How are you feeling about the health of your partners lately coming out of the recovery?

Well, reading AMC's last balance sheet, I'm feeling very good about their health. I mean they have a lot of cash, as you know. In general, some are fantastic, some are still feeling the effects of the pandemic, but you have to back away a little bit. So our receivables are current on a worldwide basis, and we feel quite comfortable with the reserves we've taken overall in conjunction with COVID and otherwise. Our theaters tend to be in the best-performing multiplexes. So I don't remember exactly the statistic. But I think in the top 20% of multiplexes is like 90% of IMAX theaters. So I always try and think about the risks. And if for some reason, there were issues with some of those exhibitors, and they have to close screens where they have to recapitalize in some way. You only have 2 issues. You have your receivables, which I said to you are keeping very current. And then you obviously have your network and someone else would buy it, but those screens buy the top 20% of the screens, I mean there's very little risk, where IMAX theaters are highly productive places. So there's not much risk sitting there either.

And because your share of the box office has been growing, does that attract more partners into your network? Is your network growing because of that?

Well, we have over 400 theaters in backlog, which are scheduled to open over the next couple of years. And we've recently -- obviously, during the pandemic, the rollout of the backlog slowed down because no was allowed out of their house. And you couldn't do construction, you couldn't build these theaters. But we've rescheduled dates on virtually all of that. So we have that in front of us for the next several years going out. In terms of new signings, it's just starting to pick up now. Again, when you're closed, it's unlikely you're going to build new theaters and the site will be -- when it opens and when you start to do business, you have more signings goes into our backlog and then you have more openings and installs. And I think we're in the first part of that where we're starting to see activity pick up and going through the year, especially when you look forward to Avatar and Black Panther. Typically, our installs are back-end loaded. So I think we'll see a lot of that happen more at the end of the year.

Can you update us on all the technical advances? I think you have cameras in the works, is that right? And how that can impact your market share over time?

So as I said in one of your earlier questions that when we use IMAX DNA like shot specifically for IMAX with cameras, we tend to index much better. And I think I gave you some of the statistics. So our film cameras are a little bit dated and I think there's only like 7 or 8 of them something like that. So we started making 4 new cameras. And actually, we're using very accomplished filmmakers, household names to help us design those cameras as the next-gen so they'll be even better. We've also enabled the use of digital cameras, using special IMAX lenses to be filmed in IMAX. So we've created something called a film for IMAX program, which means that if you use our cameras, you can save film for IMAX and then there's a lot of promotion that goes along with that. They are talking points for filmmakers, their special marketing and outreach and that's also demonstrated higher indexing. So we've invested a lot in camera technology to enable us to put more DNA and index spend. Aside from that, we've also done things like, as you know, movies that weren't filmed with our cameras we have something called the DMR process. And we've got other technology changes to bring down the cost of DMR and to make it more flexible. We invest in IMAX in the home with something called IMAX Enhanced, which we can blow off images and put them in a different aspect ratio in large home screens. And we entered into an agreement around a year ago with Disney+, where we're doing that with all the Marvel movies. So we tried to use the slower time to really accelerate our technology and our innovation efforts. And I think we've done a pretty good job on it.

How do you feel it's slipped to the balance sheet? How do you feel about your ability to weather any storm that might come? And can you update us on your capital allocation priorities?

Yes, yes and yes. We have almost $500 million in liquidity. During last year, we issued over $200 million in convertible debt. The interest rate is 50 basis points and it's convertible effectively at $37 a share. So I think that was -- we timed that pretty well. We recently renewed our revolver, which is another $300 million facility, which is completely undrawn at this point with a new bank syndicate. So we're in really good shape from a balance sheet point of view. I mean I should add, we weathered the pandemic storm pretty seamlessly. So if you know one that's going to be worse than that, Meghan, let me know, that was a pretty good and substantial threat. And in terms of capital allocation, we were doing buybacks for a fair amount of time right now. And we announced on our last earnings call that at advantageous prices, we're going to continue with that effort. Without saying anything I shouldn't -- unfortunately, the prices are quite advantageous to us right now.

Got it. What are you most excited about when you think down the line 5 to 10 years from now for IMAX?

I think it's probably the macro trends that we're aligned with. So one of those trends is blockbusters. They make up more and more of the film slate. Another trend is technology, which we're on the leading edge of them. We invest more than almost anybody in terms of entertainment, technology and our new -- like I said, live enhanced those kind of products. And then we really didn't talk about this yet, but premium, in general, has been a bigger and bigger part of the box office. I spoke with Adam this morning, and he told me on Top Gun about 50% of the business was from their premium theaters. So when you talk about these macro trends being aligned, we have an awful lot of wind at our backs.

Yes, certainly do. Well, I think that's our time, and I appreciate you being here, Rich. As always, it's always fun to get an update from you, and good luck with the rest of the summer.

Thanks, Meghan. I really appreciate it. Take care.

Thanks.