Imax Corporation

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

Thank you. Good morning, everyone, and thank you for joining us on today's Third Quarter Earnings Conference Call. I'm on the call today to review the financial results of Rich Gelfand, Chief Executive Officer, and Patrick McCliman, 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 third quarter earnings press release and the slide presentation have been posted on our 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 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 now turn the call over to Mr. Rich Gelfand.

Rich? Thanks, Brett, and good morning, everyone. Thank you all for joining us today. The IMAX Global Network gives us a unique window on the world in these unprecedented times. Despite the continued challenges the pandemic presents for Hollywood and the movie industry, we're seeing a strong rebound in many markets around the globe, with Asia in particular exceeding our best expectations. Thanks to the resurgent Asian box office, particularly in China and Japan, as well as continued growth in our theater network and strong cost management, IMAX continues to make significant cash flow improvement and stabilize its strong financial position. We believe we remain among the best positioned companies in the industry to manage through this situation. We're the only geographically diversified global platform for theatrical blockbuster entertainment. Our financial position gives us years of runway to manage through the current downturn. And our flexible premium model makes IMAX uniquely suited to thrive as the pandemic accelerates the evolution of the theatrical business. In the U.S., many industry observers continue to ask, Will audiences return to theaters after the pandemic? By virtue of our global network, we at IMAPS already know the answer, and it is a resounding yes. We are seeing fans eagerly returning to the movies where theaters are open, the virus is under control, and audiences feel safe. Today I'd like to discuss our success in Asia since its theaters have reopened, and the positive signs we're seeing in the market, an update on our strong financial position, and finally, the long-term impact of COVID on the exhibition industry, particularly in North America, and why we believe IMAX is largely insulated and perhaps even likely to benefit from many of the disruptive trends. First, let's take a look at China. Since reopening in late July, China has generated more than $1.7 billion of total box office. Average weekly grosses at the overall Chinese box office are at approximately 70% of second half 2019 levels, despite continued capacity limitations that were only recently raised to 75% and a lack of Hollywood film releases, which typically accounts for more than a third of the overall Chinese box office. More importantly, IMAX's average weekly box office since reopening has rebounded to approximately 95% of our average weekly box office in the second half of 2019. IMAX has recovered more quickly than the industry, not a surprise given we cater to the most passionate and engaged moviegoers. In the context of a challenging global environment, the strong reopening highlights China's thriving film industry. China's 70,000 theaters, many in new, impressive complexes, have opened with big-budget, local language productions that increasingly rival Hollywood's. IMAX has leaned into these long-term trends and built a strong brand in China. And by the numbers, we're leading the box office recovery in China. Overall, IMAX has delivered $66 million at the Chinese box office since reopening, representing an approximately 4% market share, up from 2.8% in the second half of 2019, and in line with full-year 2019 results. market share levels despite the delay of multiple Hollywood tent poles, which typically account for 70% of IMAX China's box office. Our fans have been among the first back to the multiplex. We've gained market share and continued to expand our brand into local language releases. We had a huge success with the 800, the first local language title shot entirely with IMAX cameras. which earned approximately $18 million in IMAX and became a top 10 Chinese film of all time at the general box office. The 800 now was in that record territory, despite being released to theaters constrained at the time by 50% capacity limitations. Earlier this month, IMAX also delivered a record-breaking box office performance for the October national holiday in China. Overall, IMAX box office for the holiday week was $18 million, up 23% over last year. The holiday was headlined by an animated feature, which earned IMAX's best opening weekend for an animated film in China and second best opening weekend for a local language film. While China has far and away been the leading market as theaters have reopened, IMAX has seen encouraging signs in other places in the world. Japan, South Korea, and Taiwan have all opened strongly with IMAX gaining market share despite the lack of major Hollywood releases. Since the July 15th premiere of the South Korean hit Peninsula, IMAX has earned more than $55 million in local language box office. In fact, in just the past three and a half months, IMAX has delivered almost half the local language grosses it did in the entire year in 2019, which at the time was a record-breaking year for us. We achieved this despite significant capacity limitations across all the key local language markets. Recent highlights include Japan's Demon Slayer, which in its first two weekends set new records for the top two highest grossing weekends ever for IMAX in Japan, earning more than $6 million in box office to date. It outgrows movies such as Star Wars movies, Frozen, not just local language titles. Any titles were released in Japan. The film was the first release in our new five-picture slate agreement with Japan's Toho Pictures, a long-standing exhibition and distribution partner for IMAX that has seen significant success at the box office including last year's breakout hit, Weathering With You. Our next film with Toho debuts in November. Overall, IMAX will have no fewer than 10 local language releases in the current quarter across China, Japan, and Russia. And we have promising releases lined up in Japan and China for early next year, including the lucrative Chinese New Year holiday. Again, we continue to diversify our global network geographically, and in terms of content, we are leaning into that diversity as we anticipate the North American box office and Hollywood releases will take a while to come back online. Where we are fully open for business around the world, we're seeing that audiences are eager to return to theaters. Now turn it to financial strength, and we have the staying power to be ready for audiences as they return. Turning to our financials, we continue to be very well positioned to manage through this challenging period. Patrick will discuss our financials in more detail in a moment, but we currently have $305 million in cash and we've continued to reduce our monthly cash burn thanks to our flexible asset life model. In fact, we expect to generate positive free cash flow in the current month of October and to be breakeven on average for the fourth quarter and through Q1 of 2021. On the last call, we mentioned that we expected our cash burn in a zero revenue environment to be less than $10 million per month. Now, with the reopening of portions of our network, most notably in China, and the resumption of installations, our average monthly free cash flow declined for the third quarter was less than $4 million, or a total of $12 million for the entire quarter. Furthermore, given the delayed release of Hollywood titles, we decided to temporarily furlough 30% of our global workforce outside of China to further reduce our ongoing operating costs. While it was a very difficult decision to furlough our loyal workforce, we expect these cost reductions to generate approximately a million dollars in monthly cash savings. In China, our headcount remains unchanged as the team works to service our fully open and our operational theaters. Now I'd like to turn to discussing the industry. While we in IMAX feel very confident in our financial position, there's clearly some uncertainty around the future of the North American theatrical industry. While the challenges facing the North American theatrical business are unique, we believe that the impact of COVID is not unlike what any number of industries are currently experiencing, where the pandemic acts as an accelerator to secular or disruptive trends that were already at hand. We believe IMAX is very well equipped to manage through this evolution and may very well benefit in the long run. First, let's look at exhibition. There is no doubt that the continued delay in the Hollywood slate and theater re-openings will have a significant impact on our exhibition partners, particularly North America and certain parts of Europe, where many exhibitors are highly leveraged with large fixed costs. There's some speculation that this could result in a contraction of the industry, again, particularly in North America. In light of this, it's important to remember that IMAX screens are almost exclusively housed in the most productive and profitable multiplexes. In North America, for instance, IMAX accounts for approximately 450 out of a total of roughly 42,000 plus screens. And in 2019, about 85% of IMAX's box office was generated in the top 20% of North American complexes. In North America in 2019, only 5% of IMAX's box office was generated from the bottom 65% of multiplexes ranked by revenue. In other words, approximately 3,500 North American mid- to low-performing multiplexes out of 5,400 could disappear overnight if we believed that it would have no material impact on our business. The approximately $375 million in domestic box office that we produce in a typical year is what we should produce even if the industry shrinks around us. In short, should the industry contract, our theaters are not the marginal theaters and our consumers are not the marginal consumers. In fact, based on our preferred locations and premium product, if feasible, we could gain market share in any such scenario. Furthermore, should any of our partners be forced to restructure in bankruptcy, we are covered by master lease agreements. which give us significant protection in the context of any restructuring. During the early 2000s, much of the exhibition industry went through bankruptcy after the mega-products building boom of the late 90s. Though smaller at the time, IMAX was not impacted. Our partners chose to continue to operate their IMAX screens. Finally, we grant our partners an exclusive IMAX geographic zone. Should a partner decide to reject their master lease agreement with IMAX, we have the option to move our equipment to an alternative operator after demonstrating whatever the box office potential was in that particular area. I'd like to talk a little bit about windowing, streaming, and the shift to blockbusters. There's also much speculation about how the studios will adapt, whether we'll see an industry-wide shrinking of the theatrical window, more releases move to streaming platforms, and multiplexes becoming limited to showing just blockbusters. First, despite the further delay in theater reopenings, we're encouraged to see that with a few exceptions, most major blockbusters continue to be delayed rather than moved to PVOD or streaming. That includes every film currently on the slate that was filmed in IMAX or includes IMAX DNA, from No Time to Die, which has moved to 2021, to Wonder Woman 1984, which for now is scheduled for Christmas 2020. The theatrical window remains an important financial and marketing component for major tentpole films. And as I've said, to date, PVOD has been a failed experiment as an option for big-budget blockbuster films. Even if we do see a shrinking of the theatrical window, this would have little impact on IMAX. Films typically play in our network for one to two weeks at most before we move on to the next blockbuster debut. Likewise, the shift to Blockbusters in theatrical distribution benefits IMAX. We're very much in the Blockbuster business. As Blockbusters move to streaming platforms with potentially shorter windows, the need for studios, filmmakers, and streamers to eventicize their content will be even greater. IMAX has proven itself as the primary platform to curate Blockbuster content. The top grossing 30 films account for only 55% of the overall industry box office, but 85% of the global IMAX box office. Finally, our experience in China, as well as markets like Japan, South Korea, and throughout Europe, has proven that audiences do return to the movies where theaters are open and people feel safe. And as they return, they return, they're coming back to IMAX in greater numbers than before on a percentage basis. This underscores our position and strength of our brand. We are a premium experience with a premium segment of the market. To conclude, we believe IMAX remains well-positioned to manage through this crisis and continue to thrive well into the future. We're the only global distribution platform for theatrical blockbuster entertainment. We have a unique diversified geographic footprint and content portfolio, which enables us to generate cash flow even as the release of Hollywood films is on pause. We have the financial strength to endure, withstand, and even capitalize on industry disruption and be ready for our audiences when they're ready to come back to theaters. We have a remarkably strong pipeline of blockbuster content ahead. Our brand and the IMAX experience have been in strong growing demand around the world. This 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. Thanks again for joining us today, and please continue to do everything you can to stay safe and healthy. With that, I'll turn it over to Patrick.