IMAX Corporation (IMAX) Earnings Call Transcript & Summary

Okay. Let's get started with our next session. Thank you, everyone, for taking the time to join us today. My name is Stephen Laszczyk, and I'm the lead analyst for the entertainment sector here at Goldman Sachs. We are excited to welcome to the Communacopia Technology Conference this year, Rich Gelfond, the CEO of IMAX Corporation. Rich, thanks for being with us today.

My pleasure, Stephen.

Rich, you've spoken about the strengths of the IMAX brand in the past and the uniqueness of the IMAX experience. Those were on display this summer with the company having the best July ever for Global Box Office driven by the success of Oppenheimer and the creation of Gods in China. So maybe to start, I was wondering if you could spend some time talking about what you believe makes IMAX unique from both the content perspective as well as for Moviegoers.

Well, IMAX is really not like an exhibitor at all. IMAX has a technology model, and we license our technology to studios, to filmmakers, to exhibitors and we get a royalty from all of that. We don't sell popcorn. We don't have leases. We don't have leverage. We're a completely different kind of company than exhibitors. But from the consumer point of view, what makes us different and special is we provide experiences, not movies. So what works in IMAX is typically something visually stunning. We work with the filmmakers for in the case of Oppenheimer almost 2 years in advance. And sort of the biggest, best movies in the world want to be displayed on IMAX. So we could use Oppenheimer as an example. Chris Nolan approached us 18 months in advance. He asked me to read the book to talk to him about it. He licensed IMAX cameras, [to film the movie]. He talked about the distribution plan both in film and in digital. And we were integrated greatly in the marketing plan and Chris was a leading spokesmen for that. As you know, we've done about 20% of the world's box office on that movie on less than 1% of the screens. And even in China, it opened this weekend, 6 weeks into the run, and we did 30% of the Chinese box office or about $9.5 million. That's just the microcosm. If you look at our box office, we're tracking towards 2019 levels for box office, we have a very different model than anyone else in the business. I think one of the reasons people have issues understanding us is because we're a unicorn. But I'd say that in a very good way, we're a unicorn and that even during the pandemic, we were positive EBITDA that we've had a very good year so far this year.

You mentioned the differences in the business model and how you're a bit of a unicorn. Could you maybe talk about what you feel like is the most underappreciated aspect of your business model? You mentioned not selling popcorn being asset right.

I think the most underappreciated thing is we have nothing to do with being an exhibitor. And I think a lot of analysts compare us to the exhibition community. And I think that comparison is really misplaced. I mean, the exhibition community is about 70% of the box office in 2019, whereas I said, we're tracking towards it. We charge a much different price structure, typically about 50% more 40%, 50% than a typical exhibitor. We don't own any theaters. We license our technology. We don't have any net debt. Obviously, exhibitors have a lot of net debt. So just to sum it up, I would say everything is the most underappreciated thing in analysts -- sorry, Stephen, to be so forward but including you, comp us against exhibition. And I think you might as well comp us, it's closer to comp us against Netflix or a tech company. So I think the most underappreciated asset is that we have nothing to do with being an exhibitor other than we sell movies.

And we can dive certainly into some of the differences there and the secular trends that IMAX is exposed to that there may be some other parts of the ecosystem aren't to the same degree. But maybe starting with one of the secular trends that I think is most important for IMAX, and that's the premiumization of the moviegoing experience. Post pandemic, there's been a clear increase for moviegoers in terms of interest of viewing movies on premium format screens. I think Comscore has data out that suggests that 17% of the total box so far in 2023 is premium format up from about 9% in 2019. What factors do you believe are driving this? And do you think that's sustainable going forward? Or is there some aberration that we're seeing post pandemic that's still playing out?

Well, I mean I think you're seeing premiumization in a lot of industries look at the Taylor Swift concert right, the ticket prices they got and the incredible demand over $1 billion to see that. I think in the sports world, you're seeing premium seats go boxes kind of across the entertainment landscape, there's a drive to premium. I think it was partly caused by the pandemic, meaning that people were locked on their couches. They got tired of not sitting there and experiencing entertainment, more or less shutting it on and off and taking snacks. And I think when people go out, they want something really special and really differentiated. And IMAX is clearly at the top end of that. It's not just a North American phenomenon. As you know, we're almost -- we're in about 90 countries and it's globally. So I mentioned in China, we did 30% of Oppenheimer right now, even for local language films in other countries, we're doing a disproportionate share for Japanese anime and Japan were out indexing for Indian films in India, we're out indexing. So it's a global phenomenon, not just the U.S. phenomenon. And the second part of your question was, do I think it will last? Well, it lasted certainly in 2022. 2022 had a fairly thin slag. But yet outside of China, we pretty much met 2019 in 2022. And this year, of course, China is not all the way back, but it started to come back. So this isn't just like a 1-week trend. It seems like years ago, but Avatar was earlier this year. And as you know, we heavily over-indexed in Avatar even though it showed up virtually on every screen that was available. So I think there's no question in my mind that this is a trend that's going to last. And as a matter of fact, I think our customers who are the exhibitors understand that. And we recently did a fairly significant deal in Europe and the exhibition partner who licensed our technology said to me, well, I could build more screens, or I could invest in IMAX. And if I build more screens, there seems to be an over screening phenomenon in most places. But if I build an IMAX and I bring in incremental revenue, that's a much better ROI for me. So I think our exhibitors have started to recognize that as well. And there's no question, we'll talk later about Dune, I'm sure. But on Dune in 2022, we did 22% on the global box office on 8/10 of 1% of the screens. So this definitely isn't a fad. And then the last thing I would add, you said premium screens. So yes, there are things that call themselves premium screens and mostly their own by exhibitors and then there's IMAX. So a premium screen is, by and large, a large screen with a regular projector on it. And when you blow up the image, it actually looks worse than it does on a smaller screen because the image degrades, IMAX is an end-to-end solution, and we're involved with, whether it's film any image in IMAX or it could be using our algorithms to convert it into IMAX. It's proprietary projection systems, which we've invented to make sure there's no degradation of the image when it gets that large there's monitoring in every theater and real time in the world. So if the volume is too low, we call up the theater and tell them to raise it or if a belt is going to break, we call them up, and we have a -- two centers, one in China and one in Toronto that manage it in real time. So although you're quite right that the trend is towards premium within that trend is very heavily weighed to IMAX. And as you know, our market share in North America is up about 50% from pre-pandemic, and our market share in the world is up about 40%.

That's helpful. Maybe touching on other trend that you mentioned briefly earlier, and that's the international growth opportunity. You currently have 1,200 screens -- over 1,200 screens internationally, up from about 1,000 in 2018. How big is the install opportunity internationally for IMAX? And what markets do you see the most opportunity to grow screens in at this moment?

I think the opportunity is large. And I don't think about it as international or domestic, although I agree with your point, international is probably bigger because they are just more on touch territories there. But this year so far, we've had 87 signings year-to-date, and that's about double what we had all of last year, and we still have 4 months to go this year. And the signings have been very much on a global basis, less so in China because China is a little later coming out of COVID than the rest of the world. But a great example is Japan, where we have per screen average of about $2 million a screen. To put that in context, that's about double North America. We had a 7-theater deal with the largest chain they're called Aon early this year, and they've all been installed, and they're all doing pretty well, some better than others, obviously. But when you look at it, once we had a new theater, we get revenues from the studios. We get revenues from the exhibitors. It leads to more awareness and again, I'll harp a little on the Aon example. They only got into the IMAX business in mid-2022. And I think they did 2 theaters or 3, and they were so successful that this year, they added the 7. But that's just a micro example of what's going on globally and in terms of what markets most excite us, I think Japan is very exciting because of the very strong PSAs. We've done very well this year in Southeast Asia. Places like Vietnam and Thailand and Indonesia, which are extremely under screen. India, we have only, I think, like 30 screens in all of India. And it is a population similar to China where we have over 800 screens in China. And then I think even Western Europe, France is under screen. We have only 10 screens in all of Germany. And that's similar to the number of screens we have in some Latin American countries. So I think our growth trajectory is extremely strong.

You mentioned the productivity in Japan at the $2 million screen. This comes up a lot in conversations with investors. I think one of the concerns about international expansion is at the incremental screen maybe in markets like a China or Southeast Asia or in India have lower productivity rates than what the existing installed base has today. How do you think about this? What are the return profiles of the incremental screens that you're putting in? Do you need as greater productivity on a dollar basis to achieve similar levels of returns.

So our productivity of our backlog and our backlog is signed, theater is not yet open, which is about 500 is very similar to our existing network. So if you look at the markets it's going into its virtually the same market. So that's kind of a question we get, are you going into lower-tier markets more than before? And the answer is no. And as a matter of fact, the territories I mentioned to you, a pretty high PSA territories. So there's been no degradation. If you look at the 87 signings this year, if anything, they're probably a better demographic because of places like China and Southeast Asia than they were before in lower demographic areas like China, for example, where the per screen averages are lower, we've changed our business model in some of the second-tier places. And just for the benefit of the audience, we have two models. One is where we sell our equipment and the other is where we do joint ventures. So as we've penetrated the higher tier markets, where we might have been happy to do joint ventures in the lower-tier markets. We're now doing much more sales or hybrids where they take a lot of the risk. So we've used our business model to insurance ourselves against that -- and also, I mean, China, we have one -- they have about 80,000 screens, and we have 800 open and another 200 in backlog. And by the way, I think we'll do considerably more there. But I think a lot of the lower PSA markets are fairly penetrated. So I don't think that's at all a systemic issue for us.

That's helpful. Maybe sticking with the opportunity in international for a moment. IMAX has developed a very robust local language strategy, working with directors in markets like China and Japan to make films for those audiences. Could you talk a little bit more about your local film strategy and the opportunity you see yourselves going after over the next 5 to 10 years?

So we started doing local language film pre-pandemic and it was a small niche business for us. But the pandemic forced us to really double down on that strategy because the warrant films coming out of Hollywood because of the COVID restrictions. And we've been very aggressive in that area. And I must say I've been surprised by how quickly it's grown traction. So in the first quarter of this year, 30% of our box office was from local language films. And just in the last week, this year has become our biggest local language film year ever, I think we'll pass $200 million probably in the next week or so and again, with 4 months to go. And we -- this year, we're going to do about 50 local language films. But for me, the most surprising part about local language is not Chinese films doing well in China and they do. We did a film called Wandering Earth 2 that did over $50 million in China. We did a film in China over the last couple of weeks called Creation of the Gods, which has done $35 million, and those are impressive numbers. But what's really surprised me is how those movies are transported to other places. So the best example is Japanese anime, which, as you know, has become somewhat of a worldwide phenomenon that we're the leading edge on. So there was a film called Dragon Ball 2 that did better in China than it did in Japan in IMAX. And it also did extremely well in Korea. And when I look at the results, it's surprising, like it's done extremely well in Scandinavia. And we're doing a film now by Miyazaki, the famous Japanese anime filmmaker and it's opening in the U.S. later this year. And again, in Japan, the weekend it open, we did 16% of the Japanese box office on less than 1% of the screens there. So I think that's a big opportunity for us. And as a matter of fact, your first question was really distinguish ourselves from exhibitors. Exhibitors don't do that. They show films that Hollywood gives them. They show them when Hollywood tells them to show them, but we're incredibly nimble. So I forget the number, but in the next 2 months, I think we're doing something like close to 10 foreign language films this week, what's today, Wednesday, I think today, we opened a film in India, which is supposed to be one of the biggest films of the year in India. Then we have another Indian film opening 2 weeks from now. We have a Korean film out there now. So I think as you look forward, as I said, we're -- our first quarter was 30, we're doing somewhere in the 20s, but I think that's a number you're going to see going up over time.

Helpful, back in 2009, when Avatar first came out, you called out the Avatar effect where exhibitors wanted to install more IMAX screens to take advantage of the strong box office demand on the back of that movie and the success of movies in the series. I'm curious with the success of Oppenheimer this year. Are you seeing a similar Oppenheimer effect take hold, perhaps movie or theaters wanting to install more IMAX screens, the 70-millimeter projectors, more directors willing to work with IMAX cameras.

In terms of the theater rollout, I think we will see that, but it's still playing. And last weekend, it did $11 million in its sixth, third, seventh weekend. So I think they're still catching their breath counting their money rather than looking to the next thing. But on an early basis, we have seen that. There have been a lot of inquiries about more theaters, but it's going to take some time. It's not -- it's not going to happen in a week or 2, but I do think we'll see it. On the filmmaker side, we're definitely seeing it. So one of the films that's due out next year in '24, the studio making the film has approached us, and said could we do film versions and release them in IMAX film theaters, someone else I'm going to L.A. after this, I'm meeting with, but I've already had a meeting about filming a big epic blockbuster with IMAX cameras on my way from the airport yesterday. I got a call from an agent for a very famous filmmaker, who said that filmmaker wants to shoot their next movie using IMAX cameras, so we can do it. So that one has been more immediate. I mean, maybe instead of the Oppenheimer effect, we should call it the no one effect. Because it's not just the cameras. Chris does such an amazing job articulating why it's special in IMAX. And I don't know whether you've seen Oppenheimer or not. But if you were designing a movie, you wouldn't necessarily say, a movie that had black and white, yes, it has the bomb sequence, but it had a lot of close-up sequences and a lot of dialogue. You wouldn't ordinarily say that that's the kind of film that's going to do really well in IMAX. But in fact, it was because the combination of Chris being a master storyteller and knowing how to use IMAX cameras having the use of those cameras and availability really turned it into a global phenomenon.

You mentioned the interest of the theaters in the back of a media like Oppenheimer and the robust demand for IMAX screens and the interest in IMAX screens more broadly. You have a significant backlog of installs, almost 500 screens, I believe, at the end of the second quarter. How should investors think about the pace of those screen backlogs converting into installs over the next few years?

Well, historically, it's been over a 3- or 4-year period. For the theaters we signed this year, the 87 -- I've mentioned a few times, those seem to be going in a little bit quicker than they did historically. So I don't remember the number, but I would guess it's more than 1/3 than what we signed this year will go in this year. So the pace has sort of quickened up. It's really good to have that backlog because when we give guidance each year about what our installs are going to be, we're not trying to putting our finger in the air and say, which way is the wind blowing we work with the exhibitors. We have teams on the ground looking at the sites, looking at the construction plans, and we have a pretty good idea of how it's going to roll out. So as you know, this year, we guided to between 80 and 100 installs and we're on pace to -- she's whispering, to what? 110 to 130. Thank you. Good catch, Natasha. 110 to 130 that was last year's guidance is 110 to 130. And we're certainly still on pace to do that this year. So we think there's a normal cadence to these things. And some of those come from out of backlog and some of those come from new science.

I think one of the conversations that's emerged on the new signing point in the pace of new signings this year has been the impact of the potential rider strike and sort of the uneven if I could call it that, pace of reopening post-COVID and sort of the stress that that's had on the broader exhibitor ecosystem. I'm curious if you're having any conversations or if you're seeing any hesitancy from your theater partners on the strike on the trajectory of the film slate over the next 12 months that might be giving them some hesitancy on converting a signing into an install.

Yes. I mean I don't think kind of saying this and I hope you have a sense for it. But IMAX is an incredibly nimble company. So the strike is going on. There's been a lot of publicity about it. Dune move from this year to 24. But instead of playing Dune, we're playing the Marvels and Hunger Games and killers of the flower moon for more time. So we had a problem, which we're a single-screen operator. So we can't -- we don't fill a multiplex. That's not what we try and do. But we had to play only one of Dune, Hunger Games and the Marvels. But now that it moved, in fact, we can play all 3, and we have a great title for next year and Dune. And when I think through this month and a little of October, it's kind of incredible if you think about it. But when you started this year, we didn't have Killers of The Flower Moon from Apple. We didn't have a Napoleon from Apple and Sony. We didn't have Barbie, which Warner just agreed to do with us 2 weeks ago. We didn't have the Taylor Swift concert, which we're doing in October. We didn't have Hunger Games. We didn't have Marvels. So that's what 5 or 6 movies added this month. So our customers don't kind of sit around and shake their heads. And I certainly don't do that because I think given what we are and what our brand represents, it's highly likely that we'll fill things in. And I didn't even add the foreign language films, as I mentioned before, like the Japanese anime that's playing here in the U.S. And I'm trying to remember, I think it's called Jawan the Indian film that's coming out. But that opens in some screens in the United States and other places. So we have a lot of levers to push. So no, I don't think people are that worked up about the strike.

Just two quick questions. Can you talk about JVs and the impact they have on new screens going forward? And so how should we think about cameras, also on the production side, how should we think about cameras and post-production? I mean you touched on them, but does that just strengthen the brand? Does it help the model? What -- I mean how does that look 3 to 5 years from now?

So in terms of JVs, and again, for those of you who aren't aware, we have a different kinds of models. One is we sell our equipment and we get a small license fee, what we give them the equipment, and we get a bigger license fee. And then there's a hybrid in the middle where we get a little money upfront, and then we get kind of a medium license fee. So the ratio is pretty much the same as it's been historically. I'd say, if anything, we're doing less JVs partly because of the reasons I mentioned to Stephen's question before in the lower-tier cities, where we can't really make the kind of return that we have historically had. We won't JV there. We'll do a hybrid, or we'll do a sale, and we're trying affirmatively to do more of that. So I think you'll still see JVs but maybe a little lower as a percentage of what we've done historically. In terms of the cameras, we've announced that we're building 4 more film cameras. And again, let me give a little bit of background. So you can get an IMAX film in 3 ways. One, it can be a regular film. And then we have proprietary algorithms that would translate it into an IMAX film. And a lot of them like Indiana Jones, for example, or Spider-Verse. -- we use that conversion technology. Then we have digital cameras where people film them with special IMAX attachments to them. So they're turn out to be an IMAX type image, and it's not that much more to film with them, but we've developed these ways you can use digital cameras, and you could use a variety of digital cameras. And then the third way is film cameras, which is what Chris Nolan used and its what bond was filmed with film cameras, Nope, Jordan Peele was film with film cameras. A number of filmmakers use film cameras. We're building four more of those film cameras. That should be ready probably sometime in '24. And I think we're in the process post Oppenheimer of analyzing what do we need more of them and how that fits into our strategic plan, but I didn't mention this, but all of the film theaters are virtually all for Oppenheimer is still playing Oppenheimer. And in certain cities like New York and London and in Melbourne, I think they're sold out through the end of September. You literally can't get a ticket for that. So I think we're looking at what those trends are and mean. And should we pay more attention to that, but we haven't figured all that out yet. The one negative on the film side is it's more expensive to use the film and to use the film cameras. Now obviously, the box office is a lot higher. So we have to do that kind of analysis. We don't want to do it unless we make more money. That's the reason to do it.

Rich, maybe on the box office firm. I mean you mentioned that the movies into the end of the year, you have a guidance for approximately $1.1 billion in global Box IMAX box for 2023. Just curious if you could maybe update us on how you're feeling about that. I think you're at just under 800 through mid-August. Any upside to that on the back of the success of Oppenheimer and some of these other big titles coming in?

If we change guidance, we'll do it on our fourth quarter call, not ad hoc, but we'll see how it's going. But as you say, I mean, the first quarter was the best box office first quarter we've ever had. The third quarter will be one of the best box office third quarter we've ever had. So intuitively, we're tracking very well against those kinds of matrix. But Stephen, that gives you a good opportunity to ask you a question, which is Goldman's had a sell on IMAX for 2 years. First, the price target was 12 than another sell in 14, then another sell and move 15. So you keep moving the price target up, but it's always a sell, and now the price is 19 and it's still a sell and we're tracking an answer to your question, in excess of kind of the best year ever in IMAX. What do we have to do to demonstrate to you and Goldman that we're not an exhibitor. And by the way, almost every other analyst has a buy on us. I'm just curious about that.

And I know we've discussed this in the past before. But I think it really is a function of the broader theatrical ecosystem. And I appreciate the differences of the IMAX business model and the success certainly so far this year but being an extension of the exhibitor of the CapEx and of the broader movie-going ecosystem, more broadly, that the leverage and exposure to that has given us some concern. And we're, I think, more broadly negative on the outlook for the box than we are on any particular one company or one company's business model. And I think for us, it's seen some of those more structural outputs of the industry post pandemic getting back to pre-pandemic levels. That would give us some more confidence on the trajectory of CapEx spend at the feeders and how that translates into installs and some of the habitual reoccurring nature of moviegoing coming back to the degree that we saw.

I promise I'll drop it after this. But when I look at Goldman's 5-year model, it has a 20% compound annual growth rate on EPS, and I look through the other Goldman coverage universe and companies that have 20% CAGRs are almost all buys. And as to the last point, the structural issues, Cineworld is out of bankruptcy. AMC has just started accessing its ATM. So their cash doing very well. It's a fantastic year for signings. IMAX is an alternative to theater CapEx, as I said, because they don't have to build new multiplexes, they just put them in. So you don't have to answer this, but I just don't understand the thesis.

I think it's more in our valuation and our outlook for a company isn't predicated on absolute growth in isolation. It's for us, where consensus where Street expectations are for a company and where we are relative to that is one factor and initiative as well. But we can certainly discuss that and for anyone who's interested in our position on IMAX, we currently get in touch with me on that. But I'm curious, just with the few minutes we have remaining -- you mentioned CapEx being a replacement and Center world emerging from bankruptcy. How do you see the structure of the industry emerging over the next a couple of years, the health of the ecosystem, the path to getting back to pre-pandemic levels of overall box.

Well, we're over the pre-pandemic levels, a box. So last year, we were not including China and this year, we expect to be overall over the pre-pandemic. So structurally, I think the industry is working well. You asked some great questions. The move to premium the move to blockbusters, the globalization. Every one of those trends benefits IMAX. Now if you talk about the regular exhibition industry, as I said before, I'm happy to comment on that, like I am about steel companies, which have about as much to do with IMAX's results in that industry. But what I expect to be happening to them is there'll be some consolidation. There'll be closing of screens. There'll have to be some rationalization of debt. I think they're going to have to pay some of it down because all the fixed leases and the fixed costs on debt I don't think are sustainable over a very long period of time. But I think they're starting to do that. I mean Cineworld did that during its bankruptcy, AMC, I think, is doing that as their leases expire. So -- and as I mentioned, a lot of clients aren't spending money on new theaters and new multiplexes instead they're spending money on IMAX theaters. So I think all of that will help them out of it.

We have a few minutes left here. I want to make sure I touch on this one last topic, which is IMAX China in July, you announced your proposal to acquire the remaining 28% of IMAX China, not owned by yourselves for $124 million. Could you maybe just spend a minute or 2 explaining the rationale for acquiring the remaining stake? And what you believe the benefits looking forward to full economic ownership will be for your company?

So IMAX China has done quite well as a business and even during the pandemic, it was profitable. It hasn't done well as a stock for whatever reasons, I'm not an expert on the Hong Kong Stock Exchange. And pretty much so we've spent a lot of money keeping it public, trying to investor relations, all kinds of things like that. So we think we could save a lot of money doing that. So it will be good for the parent company, and we also think they'll be good to offer liquidity to the shareholders in China because it just has -- as I said, it just has not worked well as a stock. I think also structurally, we can operate it a little bit differently, so we could introduce some new products to China. It's complicated because you need independent directors and Hong Kong approval to do that. And then I think there are other advantages we can do in terms of like global tax planning and manufacturing things and different issues that have hand strong us in our ability to maximize its value.

Good place their Rich, I always appreciate the debate. Thanks for spending time with us today and look forward to having you back next year.

Thank you, Stephen.

Thank you.