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.