Imax Corporation

Good day, and welcome to the IMAX Corporation Second Quarter 2020 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Brett Harris. Please go ahead, sir.

Thank you, Casey. Good afternoon, everybody, and thank you for joining us on today's Second Quarter Earnings Conference Call. On the call today to review the financial results are Rich Gelfand, Chief Executive Officer, and Patrick McClymon, Chief Financial Officer. Megan Colligan, President of 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 second 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 to 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 these forward-looking statements. 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 or future events. 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 reconciliations 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 turn the call over to Mr. Rich Gelfand. Rich?

Thanks, Brad, and good afternoon, everyone. As you can hear, I have a little laryngitis. I apologize. It sounds worse than it is, so bear with me. I hope all of you joining today are staying healthy and safe. Since the outset of the pandemic, our approach at IMAX has been to take the long view as we manage through this unprecedented event. We've carefully maintained our strong financial position. We've been unwavering in our stance that the health and safety of audiences must be the priority, and that theaters should only reopen when ready. And as a result, we're pleased to see that theaters and markets where the virus has come under control, including China, throughout Asia, key markets across Europe, and beyond, are starting to open. Our global network and our relationships with studios, exhibitors, and filmmakers around the world puts us in a position to benefit from rolling theater openings as lower-risk markets resume operations. We are the only geographically diversified global platform for theatrical blockbuster entertainment, and we hold a privileged position at the center of the entertainment ecosystem. As theaters with IMAX systems reopen, our network will begin to generate incremental free cash flow with limited startup costs thanks to our flexible asset-light business model. We are already benefiting from the local programming and classic titles being shown in international markets. As a reminder, typically two-thirds of our box office is earned outside North America. We can take a leadership role in helping to bring the worldwide theatrical industry back online, assisting studios in crafting their film slates and sharing operating best practices among international exhibitors. Today I'd like to discuss an update on the opening of our global theater network, an update on our financial position, our latest view on the global film slate, some strong signs of demand for the IMAX experience, including continued growth in our theater network, and finally, why we believe IMAX is well-positioned for the post-COVID-19 world. First, let's discuss reopenings. As of this weekend, 624 IMAX screens have contributed box office during the month of July, where 40% of our global theater network in 40 of the 81 countries and territories in which we operate. That includes 409 screens in China, 172 in the rest of the world, and 43 in North America. By the end of August, our current expectation is that approximately 1,400 screens in 70 markets, or 90% of our global network, will open in anticipation of Tenant's recently announced release date. Last weekend, we participated in the releases of Bloodshot and Doolittle in China, two new titles that had yet to open in the market because of the pandemic. We are pleased to report that we generated approximately $750,000 over the weekend with IMAX indexing 11% of the box office for Doolittle and 6.5% of the box office for Bloodshot in China. We achieved these results despite 30% capacity restriction, discounted ticket prices, and only 60% of our China network reopening. More broadly, we're excited to see over 3.2 million people return to the theaters in China with per-show attendance approximating 80% of pre-COVID level. Our North American network, which accounts for approximately 400 of our 1,500 commercial theaters worldwide, is 10% open, with approximately 43 screens operating, primarily in Canada. The reopening of our network is, of course, a positive incremental step forward for IMAX, but we still have a long way to go. These early releases won't be about huge opening weekends. Many of these markets will have capacity constraints, show times, and attendance will be spaced across the week, and in some cases, new releases will enjoy longer runs. Of course, not all consumers are ready to come back to theaters. However, there are reasons to believe consumers will come to view moviegoing as favorably compared to other forms of out-of-home activities. First, masks are absolutely crucial. We strongly advocated for our exhibition partners to require masks and are grateful to those that have done so, including our three biggest partners in North America. Additionally, large auditoriums with high ceilings, like you see in IMAX theaters, compare favorably to smaller indoor spaces such as bars and restaurants. In theaters, social distancing, capacity constraints, and traffic flow can be managed effectively. Interpersonal contact can be limited. Show times can be staggered, and food preparation, if any, can be visible or prepackaged. Consumers can also choose to attend films during off-peak periods. Importantly, sitting in a theater is a relatively static, passive, respiratory experience. You sit quietly, socially distanced, as per protocol, with people facing the back of each other's heads, not like a sporting event where people are screaming and drinking and standing up, and it's not like live theater. This is in contrast to bars, restaurants, music, and all kinds of things which feature large groups of people talking, eating, and drinking in close proximity. Based on our reopening experience today, consumer polling, and the activity of our partners, we are confident in the demand for out-of-home movie-going in general and the IMAX experience in particular. For instance, IMAX participated In the first local major language release of the year, Peninsula, the sequel to the South Korean blockbuster, trained to Busan across markets in Asia and Europe a few weeks ago. For IMAX, it was the widest premiere of a South Korean film ever and lifted us to our first million-dollar weekend at the global box office since before the global pandemic began in March. Overall, the film has earned 26.5 million at the global box office. Earlier this summer in South Korea, IMAX delivered upwards of 50% of nationwide box office on special runs of the Avengers film and the Dark Knight trilogy, despite accounting for only 5% of the screens. In the Netherlands, we sold out 30 consecutive shows in a special limited run of Chris Nolan's Interstellar. We just crossed the $1 million threshold on an IMAX-exclusive re-release in Japan of the cult classic Akira. And in France, exhibitors saw nearly 3 million admissions nationwide in the first three weeks of theater reopenings. Around the world, we're seeing solid early evidence that audiences will return to theaters where and when it's safe to do so. Turning to our financial position, our results in the second quarter were clearly impacted by COVID-19. As I said, we continue to believe that our strong financial position will allow us to weather this crisis. At the end of the second quarter, We had $319 million in consolidated cash. We amended our credit agreement, which will provide us increased financial flexibility through 2021. Given continued efforts to cut costs, we currently expect our cash burn going forward to be under $10 million per month on an average basis in a zero revenue environment. Patrick will provide additional details on our balance sheet, credit agreement amendment, and cash burn in a few moments. In summary, we believe that IMAX's solid balance sheet puts us in a strong position to reopen quickly and efficiently. Moving to the film slate, the release schedule continues to evolve. Recent decisions to delay the release of Tenant, Mulan, Top Gun, Maverick, and a quiet place are not surprising. The rising infection rate in the U.S. and other markets stands in stark contrast to the opening of large international markets where we derive over 70% of our revenue and presents a unique challenge for industry that is accustomed to global releases. First, we would like to reiterate that studios are rescheduling, not eliminating, theatrical releases for their major titles. Second, as we saw with Tenant's release strategy announced yesterday, we expect studios to release films regionally as markets reopen. Given our globally diverse footprint, IMAX is uniquely positioned to immediately benefit from this type of rolling regional release strategy. Despite recent studio moves, we still have an IMAX-friendly 2020 film slate scheduled for the remainder of the year with at least four films with IMAX DNA. Films with IMAX DNA generate a higher share of box office, showcase the IMAX experience to our engaged and passionate fan base, and serve as a key differentiator for our brand. First and foremost, After delaying its release last week, Warner Brothers announced its global release strategy for Tenet yesterday. Currently, Tenet is scheduled to open in Canada, Europe, and Asia on August 26th and in select U.S. markets on September 3rd and in Latin America on September 10th. We are excited that Tenet will be the first major blockbuster in to be released in this rollout fashion following the global lockdowns. More than any other filmmaker, Christopher Nolan makes films best seen in the IMAX experience. This is a fact best reflected in performance. His films over index on our global network. His most recent film, Dunkirk, represented 22% of its domestic and 17% of its global box office on IMAX screens. And unlike Dunkirk, which was a European-centric movie, Tenet is a more traditional action thriller blockbuster with the potential for wider global appeal. For Interstellar, we indexed 32% domestically, and for The Dark Knight, we indexed 15% domestically. Wonder Woman, which is still currently scheduled for October, features scenes shot with IMAX film cameras. Marvel's Black Widow, scheduled for November, contains 30 minutes of content with expanded IMAX aspect ratio. The Thanksgiving scheduled release of the latest James Bond installment, No Time to Die, has significant amounts shot with IMAX film cameras. And finally, While Disney has not provided an update basis, we're hopeful that Mulan will be released sometime this year. With films moving out of 2020, 2021 now features an exceptionally strong slate, which includes up to five Marvel titles, Top Gun and A Quiet Place, which were recently rescheduled, the highly anticipated new DC films, Batman and Suicide Squad, new entries from global blockbuster franchises including Fast and Furious, Mission Impossible, and Jurassic World. In terms of production, key franchise titles including The Batman, Jurassic World, Mission Impossible, and Marvel's Shang-Chi have all resumed or will resume production this summer. And many key 2021 titles, including Fast and Furious 9, Venom, and Marvel's Eternals have already completed filming. As our network does come back online, we continue to move our business forward, create new opportunities, and capitalize on the enduring strength, strong demand for the IMAX brand and experience. During the second quarter, we signed important new deals with key international partners in some of our most strategic markets. We signed a multinational deal with our partners at CGV for 17 new theaters globally. This includes nine new theaters in South Korea, one of our highest PSA markets and one of our fastest-growing markets, where we've seen considerable strength at the box office recently, as I just mentioned, with Peninsula and Library titles. It also includes systems in high-growth markets, including Indonesia, Vietnam, and Turkey. In July, we announced a 20-system deal in China with Wanda Film, China's largest exhibitor and a long-standing partner of IMAX. This deal includes IMAX replays or upgrades for 10 of its top-grossing locations, as well as 10 new IMAX theaters to be installed throughout the country. Signing these agreements in this environment is not only a testament to our sales team, it's an affirmation of the value of the IMAX experience. Actions speak louder than words, and we're encouraged that two of our largest partners chose to expand their IMAX relationships, even as their theaters were shut down. As major exhibitors around the world look past the pandemic toward the future of the theatrical business, we believe they see IMAX as a must-have premium offering with which to welcome audiences back to multiplexes. Additionally, we continue to create new value from our global brands. In June, we announced a deal to bring a catalog of 16 of our most successful IMAX documentaries to Hulu, including A Beautiful Planet, last year's Superpower Dogs, and the Academy Award-winning Fires of Kuwait. And those are available on Hulu right now. As we've said, we anticipate that in the post-COVID world, consumers will turn to brands and experiences They trust, and we believe that IMAX remains very well positioned for when we emerge from the pandemic, given the strength of our brand and the unique advantages of our model. There's much talk of how the pandemic will accelerate secular trends in the theatrical industry, but we believe IMAX is generally insulated or even potentially advantaged by some of those trends. We expect that the theatrical market will move toward premium experiences and blockbuster films, both key elements of our model. We believe that we are generally insulated from lower and mid-tier movies that will move to streaming instead of theatrical releases. Any potential change in theatrical windows will have little bearing on IMAX, as most of our films play for only one week or two weeks generally at the most. Any potential contraction in key markets like North America and China is unlikely to impact IMAX, given that we generally operate almost exclusively among the top performing theaters. In North America, for instance, IMAX accounts for approximately 400 out of a total 42,000 screens, and 80 to 90% of our box office is generated in the top 20% of our North American theaters. In China, we're present in 17 of the top 25 highest grossing complexes. Within the top 500 complexes with an IMAX screen, we contributed 22% of their box office in 2019 with a single screen in it. in each. We anticipate that our model as a global distribution platform for blockbuster entertainment and experiences will continue to reap benefits well into the future. To conclude, COVID-19 continues to pose an extraordinary challenge to the global entertainment industry. While the future is yet uncertain, we believe IMAX remains well positioned to manage through the crisis and continue to thrive when it is behind us. We are the only global distribution platform for theatrical blockbuster entertainment. We believe we have the financial strength to endure, support our partners in these times, and be ready for our audiences when they're ready to return to theaters. We have an extremely strong pipeline of blockbuster content through next year and beyond. Our brand and the IMAX experience have been in strong growing demand around the world. The unique privileged position we built in the ecosystem gives IMAX a firm footing in difficult times, and we look forward to continuing our success, driving new opportunities for growth, and creating value for our shareholders in a post-COVID-19 world. Thanks again for joining us today, and please do everything you can to stay self and healthy. With that, I'll turn it over to Patrick.

Thanks, Rich, and good afternoon, everyone. First, we want to thank our colleagues here at IMAX for their exemplary performance during this challenging period. Throughout the organization, we see countless examples of thoughtfulness, creativity, and flexibility as our team responds to the challenges of COVID-19. Thanks to all of you for stepping up. During our last earnings call, we highlighted that IMAX entered this crisis with a strong balance sheet, an asset-like business model, and the market positioning to thrive post-COVID. None of this has changed. While the trajectory of theater reopening is slower than any of us would have hoped for, we continue to face the unprecedented challenges of the coronavirus pandemic from a position of financial strength. We ended the quarter with $319 million of cash on our balance sheet, including 245 million of cash at IMAX Corp and the balance at IMAX China. Our consolidated cash balance declined by 33 million in the second quarter, validating the cash burn guidance of approximately 10 million per month we gave on the previous call. Remember, our cash burn will fluctuate on a monthly basis due to the timing of specific receipts and disbursements. Going forward, we currently expect we could keep our average cash burn under 10 million per month in a zero-revenue environment. Now that our network has commenced reopening, our actually monthly cash flow going forward will depend on box office results and will reflect some increases in marketing expenditures to support titles as they are released. Importantly, we do not plan on meaningfully ramping back up our costs until the business performance warrants it. Excuse me. During the second quarter, we amended our existing credit agreement with our bank group in response to the current environment to provide a number of temporary changes. First, our senior secured net leverage ratio covenant is suspended for four quarters through the first quarter of 2021. Next, for the second and third quarters of 2021, while we will be subject to our 3.75 times senior secured net leverage ratio covenant, we can substitute quarterly EBITDA from Q3 and Q4 of 2019 in lieu of the EBITDA for the corresponding quarters of 2020. Combined, these steps provide flexibility and clarity through Q3 of 2021. As part of the amendment, we are subject to a 75 million monthly liquidity covenant, which is well below our current liquidity at IMAX Corp of 258 million. Additionally, we are restricted in our ability to make certain payments, such as share repurchases. At any point during the amendment period, at our sole discretion, we could choose to calculate our compliance with the original Senior Secured Net Leverage Ratio Covenant pursuant to the credit agreement definition and thereby revert back to the original terms of the credit agreement. We anticipate that this amendment will allow the company to manage through the current period of uncertainty while giving us the operating flexibility to strengthen our business support the ongoing reopening of our network. We believe that the combination of $319 million in cash, modest monthly cash burn, and our credit agreement amendment contribute to a strong liquidity position and runway that will support the company well into 2021. Before I discuss the details of this quarter's earnings, I would like to state the obvious. The closure of the majority of our screens in the second quarter defined our results and make Q2 financial results essentially useless in thinking about the normalized long-term earnings power of the business. Total revenue in the second quarter was $8.9 million, down 92% versus last year. The IMAX Technology Network reported a $6.5 million margin loss on essentially no revenue. The IMAX Technology sales and maintenance segment reported revenue of $4.6 million and a gross margin of $200,000, versus $15.4 million of gross margin in the previous year. The decline in revenue and gross margin was primarily driven by two factors. First, we installed two sales and sales type leases in the second quarter of 2020, seven fewer than the nine we installed in Q2 2019. Second, maintenance revenue of $0 declined from $13 million in the previous quarter. As theaters closed, we suspended regular maintenance services did not recognize the associated revenue. SG&A, excluding stock-based comp of 23.3 million, declined sequentially from the 24.9 million of expense recorded in the first quarter of 2020, which was also down 1.1 million year over year. COVID-19 created a number of unusual items that impacted SG&A in the quarter. First, SG&A expense declined due to cost actions taken by the company in response to the pandemic. As we mentioned on the last call, in response to the late January closure of our theaters in China and then again in response to the closure of the balance of our network in March, we made substantial cost cuts. Second, the company became entitled to receive $3.2 million in benefits as part of the Canadian and U.S. government's COVID-19 wage subsidies and payroll tax credits. Approximately $2.9 million of this benefit was recorded as an offset to SG&A expense, with the remainder recorded as a reduction to cost of sales. Finally, SG&A increased due to a lower allocation of labor and other costs from SG&A to cost of sales, inventory, film assets, and PP&A. Normally, staff costs related to post-production, maintenance, and theater construction are allocated to cost of sales and certain assets. Given theater closures prevented the company from generating revenue and creating assets, these costs remained in SG&A. Ultimately, this item is just P&L geography. Adjusted EBITDA for the quarter was a loss of 18.5 million, down from a profit of 41.4 million in the previous year period. Net loss for the quarter was 26 million, or a loss of 44 cents per share, while adjusted net loss was also 26 million, or $0.44 per share, versus $0.32 positive last year. In the second quarter, we spent $2.7 million on capital expenditures. As a reminder, most of our CapEx is driven by the installation of theater systems under our joint revenue sharing model. Given the lower-level installation activity, we continue to expect modest capital requirements until more theaters reopen. Excluding joint revenue sharing investments, We continue to anticipate spending less than $10 million in maintenance capex in 2020. In the second quarter, we suspended IMAX share repurchase due to the uncertainty associated with theater closures. IMAX China repurchased 426,000 shares for a total amount of $640,000 in the first half. In conclusion, we remain confident in our strong balance sheet modest cash burn, and asset-light business model. We believe that we are well prepared as we now resume operations and get back to the movies in many markets around the world. With that, I'll turn the call over to the operator for Q&A. Operator?

Thank you, sir. If you would like to ask a question, you may press star 1 on your telephone keypad. If you are using a speakerphone, please ensure your mute function is turned off to allow your signal to reach our equipment. Please limit your questions to one. If you have any follow-up questions, you may press star one to re-queue. If at any point you would like to remove yourself from the questioning queue, you may press star two. Again, please press star one now to ask a question. We will take our first question from Chad Binyon of McGuire.

Thanks for taking my question. I wanted to start with how we should think about installs going forward. Very understanding that it was a low number this quarter, but now that you have some theaters that have opened and a lot of those zones are in a much different place now, how should we think about, I guess, the pattern or the timing of installs given the size of your backlog and now that things are opening up? Thanks.

Patrick, why don't you take that one?

Sure, happy to. Throughout this whole period, we've maintained a very active dialogue with our partners. You've seen that in the fact that we actually signed up some new transactions that Rich mentioned during his comments. We do expect there will be the typical seasonality to our activity, so we do expect to see more installs in the third and into the fourth period of the year. Having said that, there's still a lot of uncertainty. Our partners are opening back up again around the world. They're very focused on making sure that they execute the reopenings of their theaters appropriately. They've got a lot of new protocols to put in place. And so they're appropriately focused on those issues. So we don't yet have a lot of clarity on how they're thinking about installations. But we do expect that we'll ramp up through the end of this year and into next year. So right now we just can't say with clarity what that looks like, but we do think we're on a better path.

Okay, great. And then my unrelated follow-up just with respect to the WANDA and CGV contracts. Can you just talk about the average length of the contracts of your current install base and if there's any major contracts that are due to be renewed in the next 6 to 12 months? Thank you.

The answer is I don't know the average length, but most contracts are 10 to 12 years, and There are very few that are coming up in the next couple of years, and not a big number.

Okay. Thank you very much, guys.

Thank you, sir. We will take our next question from Eric Wold of B. Reilly.

Thank you. Good afternoon. I'll actually start with my follow-up question since it's a follow-up to the prior questions. I guess Assuming we do get kind of a major push of delayed installs from this year into next year, can you just remind us of your capacity for installs on a quarterly basis?

Yeah, there's pretty much no limit for our capacity. We've installed close to 100 systems in a quarter. As long as we know that they're scheduled in advance, we can just gear up because we A lot of the labor is local labor, the territories. So I don't want to use the word unlimited, but we could do much bigger numbers than we've ever installed previously if we have some notice.

Perfect. And then my primary question. Maybe given that we've had a number of months since the original shutdowns and kind of seeing what's happening in other regions, I guess recently, Any discussions or thoughts around the discussion you had with exhibitor partners in terms of accommodating capacity restrictions on IMAX screens? Are we thinking about normally you have the addition of midnight and a lot more show times on major blockbuster weekends. Is that something we should think about during the week? Do you need to keep films on screens longer than a typical week given people need more time to get into theaters if their capacity is limited? Any sense on on what you may do to accommodate that?

Yeah, it's a really good question. I'm glad you raised it because we didn't talk about it in our prepared comments. So the movie industry is interesting because in a restaurant, let's say, if the capacity is 50%, you lose money. In the movie industry, in a regular multiplex, 20% to 25% capacity is heroic. And last year, which was our highest box office ever, our global capacity was about 10%. So the network is really built for big blockbusters on big weekends. So with capacity constraints, there's certainly the potential to do good business. The question really becomes, do people move away on Friday and Saturday night? And to weekdays. And we're trying to make that happen through marketing and discounting and programs like that. And at the same time, we think some of it may naturally happen because, you know, as you saw, I'm sure, yesterday Google announced people could work from home until next July. And in New York City, only 10% of the office workers are back. So we're thinking that that a lot of people will just naturally, you know, go at different times, whether it's during the day or weekdays. So the diminished capacity probably will have an impact, but not as big an impact as you would think just by looking at the raw numbers.

It's helpful. Thank you, Richard.

Thank you. We will take our next question from Eric Handler. of MKM Partners.

Thank you very much for the question. Patrick, I wondered if you could sort of talk about, you know, since so many of your expenses are variable now, is there a certain revenue level that you need to reach in order to become profitable on an adjusted EBITDA basis?

Well, it depends, obviously, on where that revenue is coming from because of the different margin structure on the two sides of the business. Some of the modeling that we did, we actually think that in 2019, we did just short of $400 million of revenue and obviously produced $150 million of EBITDA based on that. In terms of cash flow, we know that if we only get back to half of that run rate revenue, we can get back to cash flow break-even relatively quickly. I don't have an EBITDA number in front of me in terms of what the break-even would be, Eric, but that just gives you a sense that it's a pretty flexible model, and when the revenues come back, we're going to swing back pretty quickly.

Okay. And how do you think about, you know, in terms of ramping up your expenses again and bringing back employees and making investments in some of the projects that you've been working on. What is it that needs to be seen before you start adding back costs?

I think we're going to learn with you over the next couple months. We'll see the patterns of movies opening on a rolling global basis. We'll see audiences come back. We don't really think we need to add costs in the short run. As you may recall, we really didn't lay anyone off at IMAX or furlough people. We cut back their hours. So we're in pretty good shape to reopen without incurring significant additional expense. And I think we'll just time it to how quickly we see revenues come back and how quickly we see films opening, and territories opening, and things like that. It's not going to be formulaic.

Okay. And then lastly, one last question. I don't know if you saw that AMC and Universal just signed a deal with each other that essentially gives Universal the right to launch PVOD on films that it chooses after a three-week exclusive run in the theaters. Now, you generate most of your revenue from films in the first and second weeks, but do you worry at all about cannibalization with a shortened PVOD window?

You know, we've been asked this question many times over the years in advance, and we had always said that we were very flexible on windows and we really didn't think Shorter windows would have a material effect on IMAX because we're a cultural experience. We're a fanboy experience. We show blockbusters. People want to go to IMAX to be with their friends on the opening weekend, the opening few weekends. So I don't really think it'll have material impact. Where we were more cautious on windows is we said we wanted to support our exhibition partners. Clearly, the release you referred to in the last hour indicates AMC is taking a different approach. From what I read in the papers recently online, they'll share in some of those revenue streams. I think we have to wait to hear what other exhibitors say, what that means. You also have to remember that Universal doesn't really have a big movie in North America coming out until 2021. So I think we all have to take a breath. We have Tenet coming up now. See how that opens. Get the theaters open and see how it all shakes out. But from my point of view, this isn't a shocking development, and I don't think it means anything. I'm negative things for IMAX. Thank you very much.

Thank you. We will be taking our next question from Michael N. of Goldman Sachs.

Hi. Thank you very much for the question. I just have two quick ones. The first is on the pre-COVID level attendance that you saw in China. You said it was about 80% for one of the films that came out. Is that your expectation of what the attendance could be in the United States when theatrical movies come back in force? And then the second question is really just about how IMAX changes its film selection strategy against the backdrop of these staggered releases. Does that create additional challenges at all? Thank you.

Thanks, Michael. First of all, I do think that the industry will return to pre-COVID levels, but the question is how long it takes for that to happen. We've looked at other places where there have been either SARS or other kinds of forced shutdowns, and You know, they don't snap back overnight, but over a period of time, you know, two, three months, it seems like, you know, they come back to levels they've seen before. And, again, in North America, it's particularly hard because we don't know what cities are going to open up when. But I do think, you know, people are tired of having sat on their couch for four months and watched, you know, when I did it, a lot of my favorite streamed shows. But I think people are itching to come out. And I think for the right kind of content and where they feel safe, they will come out. And actually, we did a little study, and it sounds intuitive, but places came back faster where the COVID rates were lower. So it gets hard to generalize. And that, Michael, I think we just have to see how it rolls through. But as I said during my prepared remarks, we were quite pleasantly encouraged by what happened in Korea and Taiwan and China. But, you know, I just don't think people should get ahead of themselves in predicting what the box office might be. In terms of film selection, you know, your question has an ironic aspect to it because with Tenet, It's the only film coming out, so it's not really more complicated. Right now it's easier. You know what to play. For IMAX, it's pretty fortunate that Chris Nolan and IMAX have such a brand affinity, and Chris filmed this movie with IMAX cameras, and he urges people to see it in IMAX. But I think as we see what comes out and what moves, I think it'll require sort of the same skills it required before. I think we're going to have to just figure out what plays best to our largely millennial audience, what has visual splendor, how does it fit into the calendar. And as I said, you know, so far the rest of the year looks pretty promising for us with films like Wonder Woman and Bond and... you know, other black widow coming out. So we're quite, you know, we think providing things don't move around, this is a pretty IMAX-friendly year.

Great. Thank you, Rich.

Thank you. And we will take our next question from Jim Goss of Barrington Research.

Okay. Thank you. A couple of them. One other capacity question. Given the IMAX geometry tends to push the seats toward the front of the screen and space them a little more closely, if, say, 50% is the maximum capacity in a typical theater, say even a non-recliner one, what do you think your realizable capacity would tend to be?

No, Michael. I'm sorry, Jim. That's a really good question and one which we haven't sat down to fully think through. I think my maximum capacity is 50% if that's what the regulation says or a third if that's what it says. But you're quite right, there'll be some practical issues. I really don't know the answer.

Okay. Because you would tend to be closer to capacity than others, given your blockbuster focus. And so then it gets the ability to push things out, as Eric Wold was talking about later or earlier. One other thing, the Hulu deal, is that an exclusive, or are you going to make that content available on other potentially bigger platforms?

It's exclusive in North America, but globally we can – sell it to other people, Jim.

Okay. And maybe one last one. Impact of political changes in Hong Kong on your China investment. Anything we should be thinking about or concerned about?

In the short run, there's been really nothing noticeable on the ground. And as you know, because you've covered us a while, China's been a very open place to Hollywood films because it gets people the theaters and to malls. And, you know, so, you know, in the current environment, I don't really see any impact. But, you know, who knows how out of control this all gets, especially during election season. But I wouldn't predict that, Jim.

Was there any difference on mainland versus within Hong Kong in terms of how the deals were struck?

Yeah, in Hong Kong, there's no quota. So in China, only 35 foreign films are allowed in. In China, there's not that limitation, and that hasn't changed.

All right. Thanks a lot, Rich. Take care of your voice.

Thank you, Jim.

Thank you. We will take our next question from Stephen Frankel of Call Yours.

Good afternoon. Rich, let me stress your voice with one more just along the similar lines that we've been talking. You were really successful in China over the last couple of years by juggling the film slate, being very nimble, playing multiple films in the big release weekends. How much, if any, does that get negatively impacted by these changes in release schedules and delays? Or do you still anticipate when we get to the big festivals in China, you'll have multiple films to choose from?

I mean, I do anticipate that. And in fact, we didn't mention in our script, but there were four major films in China that were supposed to play over Chinese New Year. And there were rumors that that several of those at least were going to be moved to the October holiday period in China. And I think if they're moved to that period, we would still expect to have multiple films and to program them the same way.

Okay, great. Thank you.

Thank you. We will take our next question from Alexa Quadrani of J.P. Morgan.

Hi, this is David Kronowski on Ferlectia. You know, Rich, in your opening remarks, you laid out the reasons why moviegoing can be a safe activity given lower capacity, assigned seating, patrons sitting forward, not speaking, and the like. Do you sense that theaters are gaining traction in making this argument to politicians and health regulators, or is there still some resistance in this given movies are an indoor activity?

A very good question. I think they're gaining traction, but I think that... probably as an industry, both studios and exhibitors probably could have done some of that sooner and made that case sooner and talked about jobs. There are close to 200,000 jobs in North America associated with the industry. So I think other industries did a better job of advocating that sooner. And I think that the movie industry has been playing a little bit of catch-up, but I think they've been doing a decent job recently of playing catch-up, and there's been more media. It seems to me more municipal governments more receptive, so I think they're getting some traction on it.

Okay, and then maybe just to follow up for Patrick, is there any update to the $10 million cash burn figures now that a significant portion or the footprint is up and running at some capacity?

Well, as I mentioned in the call, if we're continuing under a zero revenue, then we've communicated that it would be under $10 million. And that's a reasonable number for right now because the network is just ramping up. As it continues to ramp up, then you'll see positives in the form of revenue, and therefore you would expect to start to see some receivables. On the other side, we will spend to support the titles. And so it will be pluses and minuses on a go-forward basis. Our expectation is that as the network ramps up relatively quickly, it will head in a positive direction and we'll get back towards break-even. So hopefully that helps. We're in a good spot now, and we think we're headed in a better direction.

All right. Thank you.

Thank you. We will be taking our next question from Mike Hickey of the Benchmark Company.

Hey, Rich, Patrick, Brett. Thanks for taking my questions, guys, and a way to execute obviously a difficult environment. I'm curious if you guys have had a chance to go back into a theater, see a movie on one of your screens, and if not, if you've been able to sort of interview your patrons and after seeing a movie to get a sense of how strong the movie-going experience is with all the additional safety measures that are in place now and, of course, the risk of ongoing spread.

So I haven't, and Patrick hasn't, partly because of where we're located, but several people at IMAX were involved in tenants in the post-production phase, and their reaction was, oh, my God, I forgot how great it was to be in a movie. And, you know, Tenet is just a very beautifully filmed, beautifully made, wonderful movie. And they said when they, you know, came back, oh, my God, I forgot how great it was. And it wasn't just one person and not of one age, but a number of IMAX employees, you know, kind of spontaneously said that to me.

Nice. Thanks, guys. Yeah.

I was just going to add to that a little bit, Mike, which is the network did open up in China, and a number of our colleagues did try it out over this past weekend, and they commented that there's increased safety protocols, and you certainly noticed those things. And once you sit down and the movie begins, it feels like it always has. It was a fun, immersive experience. So they said it was really a Prior to getting into the seat, there were differences, but once you're there, they said it felt quite normal.

Nice. And is there a two-hour limit to the film play in China, or did they change that, or how is that going to impact China or any other films?

So that was a guideline when the theaters first opened, but China has already approved a number of films for the next couple weeks from now. including Harry Potter and the Sorcerer's Apprentice, Interstellar, and a number of other things that are like two and a half hours long. So we think it was just an opening week guideline, but not a rule that they intend to enforce.

Good, good. The last one for me, it seems like when you have a resurface, of the virus. This goes back, I guess, to the perception of safety, but when you sort of have a reemergence or a cluster, it seems like theaters get shut down pretty quick. And maybe you've already answered this, Rich. Just sort of curious as you move forward, particularly in China, where you're seeing pretty big bounce back with sustainability, I guess, of the reopening process. If, in fact, you do start to see a sprinkle of infections rise again. Thank you.

No, I don't know. Understanding the Chinese government and policies is a full-time job and not one that I have and not one that many people in the world are really good at. So I would guess that if there are high levels of infection rates in some cities that there could be shutdowns in those areas. But with lower infection rates, I think it depends on whether they're contained and how the government thinks about it. But again, this just plays into what I hope is the takeaway from this call, which is everybody realizes that it was never going to be perfect, and not every place was going to be able to be open at the same time. So this is the next best thing. And, you know, it gets the movies out there. It gets people back used to going to it. And I think we should expect, you know, some temporary setbacks in some markets. But it's a better result than, you know, waiting for everything to be perfect.

Thanks, guys. Best of luck. Thank you, sir.

Thank you, sir. We will take our last question from Vasily Karasov of Cannonball Research.

Thank you. Good afternoon. Rich, you laid out very nicely your confidence in this slate in the remainder of the year and looking into the first part of 21. But I was wondering if you could talk about this. So a lot of IMAX-level movies are co-financed by third parties, right? Not Disney, but a lot of them are. So in the last economic crisis, we saw a breakdown in film financing. and that resulted in some difficulties at a certain point. So I was wondering, looking at those that are in the phase of being financed, being in pre-production or something like that in the United States and in China, do you see any signs that you should be worried or we should be worried about some disruption in the output there because of the financial crisis and debt markets and so on?

I don't, James. The few films I'm aware of in the U.S. which have been co-financed, like Mission Impossible and Top Gun, those are in good shape and they're going ahead. We don't have that much visibility into the financial structure of a film because we deal with our studio partners. You know, Megan, do you have a perspective on that?

No, I think you're right. I mean, I think every structure is a bit specific, and at this time, those conversations are best left to them.

But you haven't seen at this point something that would have an impact across the board, like when the Chinese financing group

went away in hollywood you know that sort of impacted people you haven't seen anything like that no because of the crisis okay no i'd say it's the opposite actually i mean you know just to speak to what rich was saying earlier the production piece of things has actually uh gone rather well and productions have been mounted and you know hollywood productions in europe are back on and people are planning there's some big movies going back into production in September so that the pipeline is actually rather healthy and there was a lot of energy and work put into that. I think now a lot of energy and work is going in to make sure that we safely open movie theaters.

All right. Well, have a good night. Thank you very much. Thank you.

Thank you. There are no more following questions in the Q&A.

Operator, there's no further questions.

There are no further questions. This concludes this call. You may now disconnect.