Imax Corporation

Good day and welcome to the IMAX first quarter 2020 earnings conference call. All participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. As a reminder, today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Brett Harris. Please go ahead.

Thank you, Emma. Good morning, everybody, and thank you for joining us on today's first quarter earnings conference call. On the call today to review the financial results are Rich Gelfand, Chief Executive Officer, and Patrick McClimans, Chief Financial Officer. Megan Colligan, President, IMAX Entertainment, and Rob Lister, Chief Legal Officer, are also joining us today. Today's conference call is being webcast in its entirety on our website. A replay of the webcast will be made available shortly after the call. In addition, the full text of our first quarter earnings press release and the slide presentation have been posted on the investor relations section of our website. At the conclusion of this call, our historical Excel model will be posted on the website as well. I'd like to remind you of the following information regarding forward-looking statements. Our comments and answers to your questions on this call as well as the accompanying slide deck may include statements that are forward-looking in that they pertain to future results or outcomes. Actual future results or occurrences may differ materially from the forward-looking statements. Please refer to our SEC filings for more detailed discussion of some of the factors that could affect our future results and outcomes. During today's call, references may be made to certain non-GAAP financial measures as defined by Regulation G of the Securities and Exchange Commission. Discussion of management's use of these measures and the definition of these measures, as well as a reconciliation to non-GAAP financial measures, including adjusted net income, adjusted EPS, and adjusted EBITDA as defined by our credit facility are contained in this morning's press release. With that, let me now turn the call over to Mr. Rich Gelfand. Rich?

Thanks, Brett. These are extraordinary times as our world, the entertainment industry, and IMAX Corporation confront an unprecedented challenge of COVID-19. As much as we look forward to theaters reopening, we fully support local officials and our exhibition partners around the world in closing theaters as necessary. We'll also be extremely cautious in markets like China that are beginning to reopen schools, restaurants, and other public spaces. I hope all of you joining us are staying healthy and safe. Today, I'd like to discuss the continued financial strength of IMAX, the health of our brand, and our ongoing efforts to enhance the IMAX experience for our audiences, the condition of our China business, IMAX's contributors in crafting a formidable upcoming film slate, and finally, our relationship and efforts to support our exhibition partners. Looking at the first quarter of 2020, clearly our results were impacted by COVID-19. We reported revenues of $35 million, an adjusted EBITDA loss of $4.4 million, an adjusted net income loss to common shareholders of $29 million, or 48 cents per share. This includes a 10-cent credit provision that Patrick will discuss in greater detail. We installed 12 IMAX systems in the first quarter, and our commercial feeder network now stands at 1,526 feeders, up 7.5% versus Q1 of last year. I want to underscore that IMAX is in a strong financial position to weather this crisis. We entered the year with more than $90 million in net cash on our balance sheet. At the end of March, we drew the balance of our $300 million revolving credit facility to maintain maximum flexibility throughout the duration of theater closures. As a result of this strong cash position and a commitment to controlling costs, we're confident in our ability to operate through an extended shutdown in a zero revenue environment. We've already taken significant costs out of our 2020 operating structure and will continue to be flexible and respond accordingly as the situation evolves. We're a technology and licensing business. We don't have a lot of fixed assets, and we run the business with fewer than 700 full-time employees. Impressive when you think about how we have grown and managed a global brand that operates across 81 countries and territories, and our box office was in excess of a billion dollars. last year. We managed the business conservatively over the preceding years. And as a result, we believe that we have the balance sheet to be ready for exhibitors, studios, filmmakers and audiences when the entertainment industry is back up and running. Furthermore, as global economies restart, we believe consumers will turn to strong, trusted brands like IMAX. Prior to the challenges of 2020, IMAX was coming off two consecutive years of record-breaking global box office. Last year, we set records for global, local language, and international box office, including box office records in 27 countries worldwide. We entered 2020 with a record number of releases filmed using IMAX cameras. We have established a unique and powerful position in the entertainment ecosystem. Consumers seek out the IMAX experience for immersive blockbuster entertainment. Studios value IMAX as the mark of a must-see film and a powerful partner in marketing, curating, and driving box office for their biggest releases. The world's best filmmakers and creators are increasingly using our end-to-end technology to bring their artistic visions to life. Exhibitors rely on our theaters to provide a premium experience that drives ticket pricing, volume, and differentiation. And finally, streaming services offer new opportunities for us to bring new event content to our theaters and to bring IMAX technology to home entertainment. This privileged position enables IMAX to take an active role in shaping how the entertainment industry emerges from this crisis. We're also using this time to reshape how we deliver for our audiences. The last time a theatrical business saw a crisis of this magnitude was in the early 2000s, when many of the major exhibitors restructured. And while IMAX is in a far stronger position today, during the last crisis, we fostered many of the innovations that enabled our global growth over the last two decades. We invented the proprietary digital imagery mastering process, which has made IMAX a coveted partner among studios and filmmakers throughout the world. We transitioned our theater operations and technology from analog to digital, and we developed a business model that has driven our theater sales business. But taking a similar approach in this challenging time, We're accelerating the development of a comprehensive direct-to-consumer strategy to build on the strength of our brand, create new touch points with our audiences, and drive more revenue opportunities. We're developing new technologies to bring additional interactivity to our theaters. We're leveraging technologies like artificial intelligence and the cloud to better manage our internal workforce. And we're enhancing systems to better organize and codify our box office theater and financial data. Moving to China, our unique position in this market also offers us an insight into the COVID-19 situation. Given our vast network in China where we have more than 700 theaters, IMAX has been managing through the impact of this virus since January. This provides us with an up-close, on the ground look at the potential trajectory of theater closures and reopenings and consumer behavior patterns, especially as China works to restart its economy. Schools are opening across China, in-store retail consumption is picking up, and TV and film production have also resumed under strict health guidelines, all positive signs. As a matter of fact, just yesterday, A member of the Chinese government announced that he expected theaters to begin opening in early June. When theaters do reopen in China, we believe IMAX will benefit from an exceptional slate. We are prepared to immediately distribute many of the classic titles that are under consideration for release when the theaters resume operations, followed by many of the Hollywood titles from earlier in the year that have yet to be seen in China. And, of course, the Chinese titles that were originally slated for release over the Chinese New Year. Additionally, there were positive signs that Chinese audiences are excited to return to the theaters. A survey released this month by Chinese ticketing platform Maoyan found that 72% of Chinese moviegoers were eager to get back to the movies, up from 54% just a month ago. Turning to the broader film slate, in the back half of 2020 and into 2021, we will participate in a formidable content pipeline with which to relaunch the theatrical business in earnest. Given the uncertainty around theater reopenings, the slate is subject to change, but we've engaged in frequent conversations with our studio partners for being extremely thoughtful and aggressive. to find compelling release windows and serve global audiences in the best way possible. While we will need to be creative in scheduling, it is clear that studios are deeply committed to theatrical releases for the biggest event movies of the year. There is simply no way to recoup the substantial financial commitment of a blockbuster film without a theatrical release. In 2020, we are poised to set a new record for releases that are filmed in IMAX with many of the year's biggest films, including Detective Chinatown 3 in China, Christopher Nolan's latest sci-fi film, Hennessy, Wonder Woman 1984, the latest James Bond installment, No Time to Die, and Paramount's Top Gun, Maverick. Scheduled for 2021, it's an exceptionally strong slate that as of now includes three Marvel titles, included the latest installment of Spider-Man, the highly anticipated new Batman film, new entries from global blockbuster franchises, including Fast and Furious, Mission Impossible, and Jurassic World. And of course, James Cameron's Avatar 2, the sequel to the highest grossing IMAX film of all time, currently remained on schedule for the end of next year. In terms of late changes, the mostly seen release shifts. Studios with big block lists of products or major film slots, and with a two to three month delay, many studios are simply shifting their entire schedules as a group. Disney is a great example, where they moved Black Widow, originally scheduled for this May, into the November Marvel slot previously held by the Eternals. As a result, 2022, It's also currently filled with films such as Thor, Black Panther, Fast and Furious 10, and Mission Impossible 8 that will hold strong audience appeal for IMAX consumers. The long-term product pipeline is about as robust as it's been. We look forward to working with our studio and exhibition partners to bring audiences the experiences they crave. In the near term, we've incorporated a number of remote tools into our workflows and arranged for select staff to have safe access to our post-production facilities so we can continue work on forthcoming titles like Tenet. And just as in China, there are early encouraging indications that U.S. audiences are eager to get back to the movies. A survey released by research firm EDO earlier this month revealed that the overwhelming majority look forward to returning to the cinema when theaters reopen, albeit cautiously. More than 70% of respondents said they were likely to return to theaters when they reopen, including 75% of respondents between the ages of 13 and 39, which is the IMAX core audience. And while shelter-in-place guidelines have clearly driven at-home entertainment consumption, It's also clear that theatrical remains an essential part of the creative vision, consumer proposition, and economic model for blockbuster filmmaking. As I said, the road for blockbuster filmmaking runs through IMAPS, and we believe that we're well positioned to reap the benefits of this rich content pipeline as it begins to flow later this year and beyond. Despite recent challenges, We're hopeful that our exhibition partners will also reap the benefits of a strong slate, will be able to manage through this temporary closure of theaters in the near term. Earlier this month, several exhibitors made important moves to extend their liquidity, lower their risk of bankruptcy, and manage through the crisis. The exhibitors are longstanding valued partners to IMAX, and these moves drive increased stability that will benefit the whole exhibition industry, entertainment industry, and IMAX. We've supported exhibitors as they were forced to close theaters and will continue to support them throughout this situation and beyond. Agility is a hallmark of IMAX and our ability to service our partnership with exhibition. As a result, we're confident we can resume installs when conditions improve. We've grown very fast and have the ability to ramp up screen installations quickly. You may recall that in the fourth quarter of 2019, we installed a record 95 systems, which represented more than 50% of our full year installs, and we completed 57 installations in December 1. Additionally, we completed 12 installs in the first quarter of this year, despite the challenges provided by COVID-19. in key strategic markets, including China, Japan, South Korea, India, and North America. Now I'd like to talk about reopening. The process of reopening theaters will be measured. It will require time for the industry to build the type of theater-going momentum capable of supporting a blockbuster release. At first, we expect theaters to reopen with promotional pricing and library content. in cooperation with Hollywood Studios. For the limited reopenings we saw in China, theaters planned to play library content at discounted prices, with studios taking a smaller share of the ticket revenue. We also expect social distancing expectations and regulations to create limited seating arrangements. Given theaters typically operate with substantial excess capacity, we expect the industry in general and IMAX in particular, to be able to generate incremental gross margin even with constrained seating. We also believe that our core audience, the younger fanboys and fangirls that most value an opening weekend blockbuster in IMAX, be the first to resume experiential activities such as moviegoing. Let me caution that timing remains highly uncertain. As I said, based on what we've heard from the government in China, We estimate that that opens in June, with the rest of the world opening sometime in July and August. This, of course, is just an estimate. We are fortunate in that unlike most of out-of-home entertainment businesses, it will cost us virtually nothing to reopen IMAX. If you think of other out-of-home entertainment businesses like sports or theaters, live theater, There's a lot of talent you have to bring in. You have to open a lot of infrastructure, and you have to hire a lot of staff. For IMAX as a technology provider, we don't require additional employees or capital to reopen. We figuratively flip a switch. It's a distinct advantage of our technology and services licensing model. Given limited operating costs associated with our business, the first IMAX ticket sold generates incremental cash flow. To conclude, COVID-19 poses an extraordinary challenge to the entertainment industry and the experience economy in general. While this is an unprecedented situation and the future is yet uncertain, we believe IMAX is well positioned to meet the challenge, manage the crisis, and continue to thrive when it is behind us. We have the financial strength to endure, support our partners in these times, be ready for audiences, when they're ready to return to our theaters. Our brand and the IMAX experience have been in strong growing demand around the world. We're carefully monitoring the Chinese film industry, which in time will drive revenue, along with insights in how to deal with safety, responsibility, and effectively relaunch theaters. And when these theaters reopen, there's a remarkably strong pipeline of blockbuster content, and we are actively working the program through next year and beyond. The unique privileged position we built in the ecosystem gives IMAX firm footing in difficult times and we look forward to continuing their success, driving new opportunities for growth and creating value in a post-COVID-19 world. Thanks again for joining us today and please continue to do everything you can to stay safe and healthy. And with that, I'd like to turn it over to Patrick.