IMAX Corporation (IMAX) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to IMAX Corporation's call regarding its intent to acquire full ownership of its IMAX China subsidiary. [Operator Instructions] Please be advised that today's call is being recorded. I'd now like to hand the conference over to Ms. Jennifer Horsley, Head of Investor Relations. You may now begin.

Good evening, and thank you for joining us to discuss today's announcement that IMAX Corporation intends to acquire full ownership of IMAX China. On the call today to review the transaction are Rich Gelfond, Chief Executive Officer; and Natasha Fernandes, our Chief Financial Officer. Rob Lister, Chief Legal Officer, is also joining us today. Today's conference call is being webcast in its entirety on our website with a replay available shortly after the call. In addition, a press release on the transaction as well as an investor presentation have been posted on the IMAX Investor Relations page on our site. I would like to remind you of the following information regarding forward-looking statements. Today's call as well as the accompanying materials may include statements that are forward-looking and that pertain to benefit to the acquisition, future results or outcomes. These forward-looking statements are subject to risks and uncertainties that could cause our actual future results to not occur or occurrences to differ. Please refer to our SEC filings for a more detailed discussion of some of the factors that could affect our future results and outcomes. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information, future events or otherwise. During today's call, references may be made to certain non-GAAP financial measures. Discussion of management's use of these measures and the definition of these measures as well as a reconciliation to non-GAAP financial measures are contained in this afternoon's investor presentation, which is available on the Investor Relations page of our website at imax.com. With that, let me now turn the call over to Mr. Richard Gelfond. Rich?

Thanks, Jennifer, and thanks, everyone, for joining us. We're excited to announce our intent to acquire full ownership of IMAX China. The proposed transaction is for approximately HKD 10 per share in cash or a total of USD 124 million. We believe we are acquiring it at an attractive multiple. The offer represents an approximately 49% premium to the 30-day trading average closing price of IMAX China. IMAX's global growth strategy is predicated on being nimble, true and opportunistic from region to region, market to market. It's a strategy that has carried us to nearly 90 countries and territories helped us build one of the most widely recognized entertainment brands worldwide and established IMAX as a critical piece of the future of movies. The proposed transaction is a clear reflection of that strategy, and we believe is positive for both IMAX Corporation and IMAX China shareholders. We believe this rewards IMAX China's shareholders by offering them a premium to today's market prices and immediate value on their investment. For IMAX Corporation, this transaction is expected to provide immediate financial and operational benefits. First, from the financial perspective, we expect this acquisition will be accretive immediately following completion based on IMAX Corporation's and IMAX China's financials. If you look at the first quarter of 2023 results by way of example, and adjust them to add back the IMAX China minority interest, then IMAX Corp. Q1 adjusted EBITDA would have been $5 million higher or 18% higher. And Q1 net income would have been $2.7 million higher, which equates to earnings per share of $0.05 or 109% higher. In fact, it's much more accretive than if we had bought in IMAX Corp. stock under our share repurchase plan. And this is before realizing approximately $2 million of annual public company cost savings as well as potential tax efficiencies resulting from the China go-private transaction. It would also allow us greater flexibility in the usage of IMAX China's cash, which was approximately $78 million at the end of Q1. Second, strategically, this unifies IMAX Corporation at IMAX China and would allow us to be faster and more flexible and bringing promising new growth initiatives, particularly our streaming and in-home entertainment technologies for the China market. Third, from an operating and structural perspective, this would streamline our corporate organization, reducing costs and potentially driving greater efficiency across our business. It would also streamline our financial reporting. We already consolidate IMAX China revenues, and now we will be able to consolidate the full EBITDA and profit of our highest profit region. Furthermore, it takes out the illiquid to IMAX China shares, which we hope will reduce the complexity for public markets when valuing the entire IMAX enterprise. We remain as optimistic as ever about IMAX, its business, and its future growth potential in China. IMAX is a valuable, widely recognized premium brand in China. The first quarter was our highest grossing Q1 ever in China, thanks to our highest grossing Chinese New Year ever, thanks to our highest grossing local language release ever, and resulting in our highest grossing quarter ever for local language films. Through our diversified programming strategy, we are the only global entertainment platform in China that could take advantage of Hollywood blockbusters like Mission Impossible and local blockbusters like Lost in the Stars. Hollywood films are securing release states in China with increasing consistency. According to Maoyan, 26 U.S. films have been approved for release in China year-to-date versus 25 for the entirety of 2022. We consistently deliver double-digit opening weekend box office market share on Hollywood releases, even though we're on 1% of screen penetration in China. We are working more closely with China filmmakers and studios than ever. We've launched some of our most exciting brand extensions into streaming, mobile and other platforms to date in China. And we believe this transaction will further strengthen the financial and operational foundation of our business and help foster a new era of growth for IMAX in this vital market. With that, I'd be happy to take your questions.

[Operator Instructions] Our first question comes from the line of Eric Handler of ROTH MKM.

Rich, so back when IMAX China went public, I think 2015 or so, one of the reasons that you talked about going public was it looked good politically and has served the purpose in China to have that. Here we are 8 years later, I'm curious, as you buy this in, does it make a difference at all politically? How is your standing with the government?

So the IMAX China IPO was done at a time of our rapid expansion in China to unlock the value to shareholders of the much higher growth rate in that region, but we're much more established now. We raised the cash in the IPO, and we invested it and took out a private equity holder. By the end of 2015, when we did that, we had only 290 locations in China. We now have close to 800. We'll continue to run our business in China, just how we've been doing. We have over 100 employees in China, and that won't change. Local leadership remains the same. Strong relationships with government entities and exhibitors, deep connections with local filmmakers. Brand awareness study in 2019 by Maoyan showed an 85% awareness for IMAX. Our market share in China in Q1 was up 4% to 4.6% on 1% of the screens. The short answer is, we're comfortable that we become very established during that point in time. As a matter of fact, as you know, well, Eric, local language is a very important part of the box office and our relationship with stars, with directors, with studios is very different than it was at that time. So we're very comfortable that this won't really affect our fundamental position or our relationships.

Great. And then just as a follow-up. You mentioned in your prepared remarks about having some opportunities that you previously weren't capitalizing on specifically streaming and in-home. I think this is somewhat new in terms of what you're mentioning here. Is that something you can elaborate on at this point?

Yes. I would just say, Eric, if you look at some of our initiatives on the corporate side, like SSIMWAVE, since they're non-businesses, of which IMAX-China bought into, we couldn't otherwise launch those opportunities in China, unless IMAX China decided to buy in and there was a separate strategy, which is time-consuming and complicated. So as a result of this potential transaction, we'll be able to roll out our initiatives a lot more seamlessly in China than we can today.

Our next question comes from the line of Michael Hickey of The Benchmark Company.

Hey, Rich, I hope you can hear me. Lines are little shaky here. Hope you guys are good. Congrats on this deal. Very exciting. I'm not sure if Natasha is on the call here or not. But if so, she may want to chime in. Just curious, I appreciate the $5 million add back in the first quarter. If you look sort of pre-pandemic, it look like for the year of '19, the add-back would be about $22 million in EBITDA. And obviously, that's off a whole box office and I think pretty good network growth, which is adding some EBITDA to the total. So I guess how do we think about in a normal China market, 1Q was great, 2Q not quite as great, but obviously, we're hopeful for the year. But in the full box office are close to it and with some network growth, Rich and Natasha, what's the add back on EBITDA? And then, Rich, just to that question, I know you said you're going to keep the employment, the same 100 employees. Daniel, obviously, looks like a superstar CEO. So it's great to hear that. But I imagine that there would be some efficiencies from the team given that they're not running a public company, and I'm guessing that some of the [ intent to ] streamline and guessing some of the operational elements would be streamlined given that they're not a public company. So I was just curious on the math there as much as you can help us.

Yes. So in my remarks, I mentioned that we expected to save approximately $2 million, maybe a little bit more in public company expenses. And obviously, that would entail some of the people who are involved in running it as a public company and some other related costs, like board fees and things like that, issuing reports, conference calls, things like that. So there will be incremental savings that we did not include when we talked about the accretion and how much it will be accretive. Obviously, the more the earnings are in China, the more value we'll get to be accretive. But we're not going to give guidance for the rest of the year or for next year in China. There are a couple of reports out there that you can consult from analysts. But we're very excited about the transaction and its impact on EBITDA and earnings for IMAX.

Yes. Nice to know. We are, too. Just I guess second question, Rich. I remember as well when you did this deal, it was super exciting, and I think it was definitely the right move. Just curious like how this sort of originated the time line, why it makes sense to sort of do it now? Obviously, I don't want you to lay out your whole pitch again. But just sort of curious, maybe anything incremental there. And then just the box in 2Q in China was a little slow. Just curious how you see the remainder of the year in network growth in that region?

So China started to rebound from the pandemic in December when the quarantines were lifted and movie theaters were reopened. And in the first quarter, as I said, it was our best first quarter ever. We have not yet reported our second quarter. But things are certainly better than they were during the pandemic, and it's coming back. And I think it would be our hope and expectation that over time it would come back to pre-pandemic levels. And hopefully, over time, even better than that because of our increased focus on local language films. So we're optimistic about the market. In terms of why now and the reasons, the capital markets in China have not really appreciated the IMAX China story. And the sector is down, the volume is very low. We used to have 15 analysts that covered us. We now have 3 analysts that cover us. And I think we just looked at all the factors I discussed in my opening remarks, and we concluded that this was the right time to do it.

Our next question comes from the line of Omar Mejias of Wells Fargo.

Rich, maybe quick questions. How will this change your go-to-market approach in China? Maybe can you talk around some of the near-term opportunities and then more of a long-term approach. Would this have any specific impact in terms of how you go about local language films? I know that's been a very successful strategy for you guys. But any immediate changes to your operational strategy there? That would be helpful.

I don't think so, Omar, other than the cost savings of being a public company. And I think -- we'll also take a look at our cost structure overall. It also gives us just much more operating flexibility. As I mentioned in my opening remarks, we could do different kinds of tax planning on a global basis, and we think that could be advantageous to the entity overall. And being listed on the Hong Kong Stock Exchange puts a lot of constraints on your operational flexibility, and we can more align the operations of China to the operations of Corp. So I think over time, other benefits will accrue.

[Operator Instructions]. Our next question comes from the line of Eric Wold of B. Riley.

Rich, kind of a follow-up on a previous question. I don't think that you've announced any new signings in China so far this year. So how do we think about the ability to harvest the existing backlog in that country? Has the trend and time line on installations out of backlog changed, if at all? How flexible are you seeing that backlog in terms of moving locations around the different cities or [ the media ] they originally planned to boost monetization of the backlog.