Imax Corporation

Good day, ladies and gentlemen, and welcome to the IMAX Corp Full Year 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Brett Harris. Please go ahead.

Thank you, and good afternoon, everyone, and thank you for joining us on today's fourth quarter earnings conference call. On the call today to review the financial results of Rich Gelfand, Chief Executive Officer, and Patrick Kleiman, 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 fourth quarter earnings press release and the slide presentation have been posted on the investment 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 forwarding 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 SET 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 added 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 the reconciliation of non-GAAP financial measures, including adjusted net income, adjusted EPS, and adjusted EBITDA at the fund-backed credit facility, are contained in this morning's press release. With that, let me turn the call over to Mr. Rich Gelfand. Rich? Thank you, Brad, and good afternoon, everyone. Thanks for joining us today. As we saw with last month's record Chinese New Year, the impressive rebound of our business in Asia offers an encouraging sign of pent-up demand for the IMAX experience around the world. This success is reflected in the results we share today, which demonstrate IMAX's continued strides towards a post-COVID recovery and with our excellent strategic position. We believe IMAX is well positioned to help lead the recovery of the global entertainment industry. We continue to see that when the virus is under control and people seem safe, audiences are returning to theaters. As they do, IMAX often outperforms the industry. Our fans are the most engaged and passionate moviegoers and have come back to the theaters first. Audiences want the biggest and best experience they can get as lockdowns ease, and IMAX represents the pinnacle of immersive entertainment. And finally, while continued delays in the Hollywood slate push out our recovery curve a bit, These delays have yielded what we believe is an unprecedented pipeline of IMAX-friendly blockbusters that will fuel our recovery in the second half of the year. There's no question the pandemic created challenges to our business, and it's also revealed the unique advantages of our business model. Disciplined financial management and a superior balance sheet, a flexible asset-like business model with a low fixed cost base, a global diversified network and content portfolio, longstanding partners that continue to choose to grow with IMAX and see our technology as vital to their recovery efforts, and a nimble organization and creative workforce. I am proud of how efficiently our teammates have been able to adapt to an industry that seems to change on an almost weekly basis. With that in mind, I'll provide an update this afternoon with our performance at the global box office and how it signals strong pent-up demand for the IMAX experience. Our successful efforts to grow and reopen our theater network. And finally, a quick look at our financial results, which demonstrate a superior business model and continued momentum. First, looking at the global box office, Asia continues to lead the way with its stronger than expected rebound, a clear sign that audiences are eager to get out of their homes and enjoy the communal, immersive experience that IMAX provides. Most recently, last month's Chinese New Year opening weekend blew away our expectations. While we hoped for business to meet a record-breaking performance in 2019, the strong Detective Chinatown 3 results drove our opening weekend box office up 45% from 2019 record levels. For the entire holiday period, the industry earned a total of $1.2 billion in box office, up 32% over 2019. Overall, China emerged as the number one box office market in the world in 2020, and eight films have crossed 1 million RMB, or $150 million, at the Chinese box office, including the highest grossing film of 2020, the 800, the first Asian film shot entirely with INAX cameras. INAX technology has helped lead the way. This is the result of our multi-year strategy, to build our brand and deeply embed our technology in the Chinese economic entertainment system. 2020 marked our second best year ever in China for local language box office, beyond only our record-breaking 2019, which is remarkable given theaters were closed for more than half of the year. Our average daily box office in China recovered to approximately 80% of second half 2019 levels, despite a continued 75% capacity limitation in Chinese theaters and an almost complete lack of new Hollywood blockbuster releases. The national holiday in October of 2020 saw impressive growth with IMAX's box office increasing 23% year over year. In December alone, our Chinese box office was up 28% year over year, easily topping 2019 results that included Hollywood franchises like Star Wars and Jumanji. We set a record over New Year's with our box office tripling over the prior year on the performance of Shockwave 2. Furthermore, we are seeing clear evidence of a continued shift to premium in Chinese box office results. As audiences emerge from lockdown, they want a premium experience when returning to at-home events, and the IMAX experience and the IMAX brand provide that. In the second half of 2020, our market share for all films in the country grew from 2.8% to 3.6%, despite IMAX accounting for only 1% of the screens. With the Chinese blockbuster Shockwave 2, for instance, IMAX delivered approximately 12% of the overall box office, even topping 20% of the overall box office, on some weekends, despite, as I just noted, accounting for only about 1% of the screens. Because of these excellent results, IMAX China was able to maintain the dividend in 2020 and will raise its dividend payout ratio going forward from 33% to 50% of net income. This underscores our confidence in the business, pent-up demand for moving on, the continued recovery of the entertainment industry, and the future cash flow generation ability of our network in China. We've also seen record-breaking results in Japan and a very strong market in South Korea. In Japan, the local animated blockbuster, Demon Slayer, now stands as the highest-grossing IMAX film of all time in that country, with more than $27 million in IMAX box office. Globally, it was second to only Christopher Nolan's pennant in terms of IMAX box office for the year. On the heels of its massive debut, we announced a slave deal with the film's distributor, Toho Pictures. our first slate deal with a distributor outside of Hollywood. Our next film with Toho, the highly anticipated Shin Evangelion, is expected in theaters next week. Demon Slayer also performed remarkably well in South Korea, where IMAX earned 20% of the overall opening weekend box office on just 17 screens, the biggest IMAX opening for an animated film ever in South Korea. The South Korean box office overall has rebounded nicely, beginning with the July release of the Blockbuster Peninsula, which we played across 26 primarily Asian markets. The strength of the rebound in Asia bodes well for similar combat across the world, particularly in light of the strong Hollywood play that lies ahead. The first month of the year saw some significant but not unexpected shifts in release dates, including today's announcement that Fast and Furious 9 would move from Memorial Day in May to June 25th. This supports our belief that there will indeed be a summer blockbuster season this year. At the same time, the key players in Hollywood continue to affirm their strong commitment to the theatrical windows. It's become clear that we won't see a one-size-fits-all approach in windowing. Disney is varying its approach from title to title, but it's emphasized that its flywheel relies on the value of theatrical and building franchise intellectual property. Paramount is implementing an exclusive 30 to 45-game window for its biggest blockbusters, including Top Gun, Maverick, Mission Impossible 7, and A Quiet Place 2, all IMAX releases. And we believe Warner will announce a more exhibitor-friendly release strategy for its 2022 slate. The one constant, though, is that IMAX will become even more important to studios, filmmakers, and talent as a critical driver of box office in a world of shortened windows. With our premium ticket prices, the prestige of our brand tends to lends itself to blockbuster releases and our ability to eventicize movies, distinguishing them from others in a crowded marketplace. And as such, we've heard from many of the biggest names in Hollywood in recent weeks about how they can work more closely with INACs. We see positive signs outside of Hollywood as well. We were pleased that Governor Cuomo announced that New York theaters would reopen in early March. As the largest market in the U.S., this represents an important step in reopening the domestic exhibition industry. And remote is one of the major obstacles to Hollywood releases, and we look forward to those reopenings starting tomorrow. Vaccine distribution is clearly picking up in the United States, with the Biden administration securing 200 million new doses and predicting that virtually everyone who wants one will have access to the vaccine by May. Today, more than 70 million people in the U.S. have received their first shot. The daily vaccination rate is approaching 2 million a day, all without the benefit of the recently approved one-nose vaccine from Johnson & Johnson. We believe the world will feel very different in a few months. In light of this progress, we continue to see much promise in the second half of the year with entries from many of Hollywood's most bankable and IMAX-friendly franchises, including multiple Marvel films, The James Bond Movie, Fast and Furious, Top Gun Maverick, Mission Impossible, And once the virus is under control, we remain confident, based on our experience in Asia, that audiences are eager to get out of the home, to return to the movies, and to seek out premium experiences. IMAX remains in an excellent position to benefit from this pent-up demand, gain market share, and return quickly to profitability. Looking at our network, we also see signs of demand for the IMAX experience among our exhibition partners, as we delivered significant new system signings and installations in 2020. For the full year, we signed agreements for 65 IMAX systems and installed 71 new IMAX systems globally, including 33 in the fourth quarter. And our backlog remained remarkably stable, ending the year at 527 compared to 531 at the end of 2019. Given pandemic-related theater closures and related financial pressure on operators, this is clear proof of our partners' commitment to the IMAX experience and a positive indication that exhibitors see IMAX technology as a must-have offering and a value driver for audiences. It was also a remarkable logistical feat. given the challenges of technical operations and travel in the middle of the pandemic, that we were able to install this main system. As of now, 1,077, or approximately 70% of our global network is open. With encouraging signs at the box office and throughout our network, IMEX continues to drive consistent financial improvement. IMEX is a unique entertainment technology business and our financial results reflect our superior differentiated business model. We've driven strong sequential improvement across virtually every key metric since we first felt the global impact of the pandemic in Q2. That includes revenue, box office, EBITDA, and free cash flow. But I'm actually achieving positive EBITDA and cash flow in Q4 for the first time since Q1 of 2020. Notably, we achieved these results with only a portion of our network generating significant revenue without the major Hollywood releases that have historically driven our box office and many of our present partners under substantial financial pressure. Despite these headwinds, both our technology network and technology sales and maintenance revenue improved sequentially, contributing to positive EBITDA and free cash flow.

In short, both our audiences and our exhibition partners continued to demand IMAX.