Imax Corporation

Good day and welcome to the IMAX Corp First Quarter 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Brett Harris. Sir, please go ahead.

Thank you. Good morning, everybody, and thank you for joining us in today's first quarter earnings conference call. On the call today to review financial results are 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 first quarter earnings press release and the slide presentation have been posted on the investor relations section of our website. At the conclusion of this call, our historical Excel model will be posted on the website as well. I'd like to remind you of the following information regarding forward-looking statements. Today's call, as well as the accompanying slide deck, may include statements that are forward-looking in that they pertain to future results or outcomes. These forward-looking statements are subject to risks and uncertainties that could cause our actual future results or occurrences to differ. 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, future events, or otherwise. During today's call, references may be made to non-GAAP financial measures. Discussion of management's use of these measures and the definition of these measures, as well as a reconciliation to non-GAAP financial measures, including adjusted net loss, adjusted EPS, adjusted EBITDA as defined by our credit facility, are contained in this morning's press release and in our earnings material, which are available on the Investor Relations page of our website at imax.com. With that, I'll turn the call over to Mr. Richard Gelfand.

Rich? Thanks, Brad, and good morning, everyone. Thanks for joining us today. Since its earliest days, the pandemic has invited a guessing game of how the world will change when COVID-19 is finally mercifully behind us. But we believe the post-COVID future of entertainment is coming into view for the first time. And that beginning of a cultural and behavioral shift is at hand. For the past year, two things have been invariably true of global customers. One, they've been stuck at home, and two, they've had a brush with mortality and thought about it. Streaming media sustained many of us through the lockdown, and it did a great job of it. It turns out people stream a lot of TV, particularly when they're locked in their living rooms, and it's the only thing they can do. But the data shows people are ready for more. Having lived through lockdowns, we don't believe consumers will be content to stay in their homes. We believe they will lean hard into experiences, opportunities to express the personal freedoms they lost, be around other people, and expand their worldview beyond the couch. We see signs that the experience economy is poised to come roaring back. Travel, live music, sports, theater, and yes, the movies. And the cinema continues to be among the first forms of out-of-home entertainment to come back online in many markets around the world. It is a widely accessible and affordable experience, but one that's nonetheless immersive, transporting, and most importantly, communal. And the premium IMAX experience is the biggest, best, and most globally renowned cinematic experience you could get on the planet. That's why we've helped lead the global film industry out of the pandemic in Asia and why we're beginning to do it around other parts of the world. For all its challenges, the pandemic has revealed many strengths of the IMAX business. We are the only global out-of-home platform for blockbuster entertainment. We're in 84 countries and territories worldwide. We've taken advantage of markets on the road to recovery and weathered markets that remain closed. We've leaned into our strong network in Asia as audiences there return to cinemas in numbers beyond even pre-pandemic levels. In China and Japan, local blockbusters are shattering box office records and driving increased IMAX market share. despite capacity limitations. After the successful reopening, there is now, in other parts of the world, it is now spreading to other places, most notably the very encouraging performances of Godzilla vs. Kong, Mortal Kombat, and Demon Slayer. We have a flexible asset-light business model. We've withstood the temporary closure of theaters and aggressively managed our cost structure. maintained our liquidity, and preserved our balance sheet. Our ratio of fixed to variable costs allows us to be very nimble. We don't own significant real estate. We're not burdened by leases. We don't have staffing at our theaters. And as global markets reopen, we're able to bounce back quickly to generating box office, essentially flipping a switch without significant startup costs or lead time. We're an in-demand global brand. In the post-pandemic era, it is clear people will turn and are turning to brands they trust. Studios are prioritizing IMAX release windows so they can lock in their slates, while filmmakers want more IMAX DNA and technical support for their films. We've added more than 80 new systems to our network during the pandemic as exhibitors look to IMAX to reinvigorate their business upon reopening. Consumers want the most immersive experience as they return to the cinema and they are choosing IMAX. We continue to see that where the virus is under control and people feel safe, audiences are eager to get out of their homes, return to the movies. and most importantly, return to IMAX. And as the momentum of the global reopening is evident in the financial results we report today, as the industry turns the corner, two key strategic things have become clear. One, global pent-up demand for movie-going is real and is strong. And two, IMAX's unique position at the center of the global ecosystem is as important as ever. This creates a world of opportunity for IMAX. I'd like to quickly touch on a few things today before handing it over to Patrick. Progress on the reopening of our global network, which demonstrates the durability of moviegoing and near-term opportunities for IMAX. Accelerating momentum in our industry, operating performance, and recent results as the success we've seen in Asia starts to spread to other global markets. And finally, our compelling strategy and market position as we look ahead to a post-COVID world. First, the global network and the slate. The encouraging signs we see at the Asian box office grew even stronger in the first quarter. In China, the box office rebound and the robust pickup and installations drove revenue recovery to pre-pandemic level of $26 million, in line with our first quarter of 2019, and that's without Hollywood films. We continue to deliver strong box office and grow indexing across both local language and Hollywood titles. It's a trend that extends to Japan as well. IMS has now delivered its number one and number two all-time highest grossing Japanese films, during the pandemic with Demon Slayer and Shin Evangelion, and that's the highest grossing films of all time in IMAX. Since last April, we've achieved in Japan, since last April, we've achieved a massive $1.2 million per screen average in Japan, again, largely without Hollywood films. The first quarter also gave us conclusive proof that pent-up demand for moviegoing exists beyond Asia. Godzilla vs. Kong blew away expectations and has grossed more than $400 million at the global box office. And six of the film's top ten highest-grossing markets in its first weekend of global release were outside of Asia, with very strong performances in North America, Mexico, Russia, Spain, Australia, and Saudi Arabia. More recently, the domestic box office saw its best weekend of the pandemic era last weekend, with the North American debut of Mortal Kombat and Demon Slayer. We continue to see opportunity for the remainder of the year with blockbuster releases including Quiet Place 2, Fast 9, multiple Marvel films including Black Widow, James Bond, Dune, and Top Gun. Many of those have IMAX DNA in them. And 2022 looks to be remarkably strong, with multiple Marvel and DC films, as well as new installments of Jurassic World, Mission Impossible, and, of course, Avatar 2. Just this quarter, we re-released Avatar 2. along with the market in China, and only 1% of the screens. We did about 30% of the re-release. Turning to our results, IMAX continues to drive financial improvement. In the first quarter, we delivered year-over-year quarterly growth in revenue, gross margins, and EBITDA, our first quarter of year-over-year box office growth in the pandemic era. With the robust state of the capital markets, we chose to add additional liquidity through a convertible debt offering. I'll let Patrick walk through the details, but the headline is this. We're able to add more than $200 million of additional liquidity while significantly reducing our total annual interest costs. While we have always benefited from a solid balance sheet, this transaction gives us additional security and the flexibility to invest in our business for years to come. I'd like to look at IMAX beyond COVID. Given the early trends we are seeing around the globe, we are very confident in our position in the out-of-home entertainment market. To build on our momentum, we're exploring ways to leverage our brand and technology for in-home entertainment and the streaming market. Through IMAX Enhanced, we optimize blockbuster content for in-home consumption and provide the best movie experience outside the theater. Using our proprietary technology, we digitally remaster exclusive content to be delivered through high-end consumer devices and streaming platforms around the world. IMAX Enhanced is available to stream in markets including North America, Europe, China, and Japan. And IMAX Enhanced certifies devices that can be purchased through more than 20 leading consumer electronics manufacturers, including Sony and TCL. In the first quarter, we unveiled our single biggest drop of new enhanced content yet, adding more than 50 new Sony titles, and international hits, including last year's top box office performer, The 800, out of China. More than 100 films are now available through Enhance, from recent hits like Spider-Man, Far From Home, to classics like Top Gun, to incredible documentaries like A Beautiful Planet. And we will continue to grow that ecosystem with new partners and more content. In tandem, we've worked hard over the last year on an artificial intelligence strategy to understand whether there is a significant business in using machine learning for image enhancement. We believe we can develop potentially transformative products, meeting the need for fast, effective, and low-cost enhancement across professional and personal content. And we bring real, unique advantages to the table in this effort. IMAT's film cameras capture images in stunning 12K resolution. We have greater access than anyone to the best, highest resolution content in the world over the last number of decades. That content is unique and it's invaluable in teaching an artificial intelligence tool how to up-res content. Furthermore, our relationships with creators and content owners put us in a prime position to market such a solution. As such, we've created IMAX AI, a joint venture with an AI company called Maximus, founded by entrepreneur Dr. Daniel Nadler. Daniel is best known as the founder of Kensho Technologies, an AI and data science firm he sold to S&P Global. in 2018 for $550 million, at the time the highest sale of any AI property ever created. Maximus brings not only pedigree and proven success, but an entrepreneurial agile approach. We've been working with Daniel and his team for a year as our post-production and tech teams help develop proprietary algorithms. that can up-res content to 4K, 8K, and beyond, and most importantly, at very high speeds and low costs. We see virtually limitless applications for such a solution, from high-speed enhancement of library content for streaming to real-time up-conversion of live sports and entertainment to potential technologies for consumer devices. Think of the decades of content stuck in standard definitions. and untapped for streaming, classic sports footage, iconic films and series, important news and documentary content, or what you could do with live up conversion in a world of increasingly globalizing sports leagues. Over time, we believe this JV will develop new products and services that will help us continue to grow our IMAX enhanced business as well. And as such, we've moved IMAX enhanced under the IMAX AI joint venture to ensure these efforts are tightly aligned. In sum, we see a potentially large market opportunity, leverage our strong brand technology and relationships without material op-ex or cap-ex investments. We look forward to sharing more of this as our partnership progresses. To conclude, we are encouraged by the signs we're seeing on the global marketplace. The IMAX experience has been in strong, growing demand around the world, and we are strengthening our position as one of the world's premier entertainment experiences. We look forward to building on our unique privileged position in the entertainment ecosystem, driving new opportunities for growth and creating value for our shareholders. And on a final note, as I'm sure you read in our press release, Patrick McClimat will be leaving next month, will be leaving IMAX next month to embark on a new chapter and taking a role as CFO of a private company. On behalf of all of us at IMAX, I want to sincerely thank him for his lasting contribution to the company. He has been a trusted, valued partner to me and our entire senior management team throughout the tenure as we continue to grow our network and strengthen our global brand, and particularly as we've navigated through the issues over the past pandemic year. Patrick, I wish you and your family all the best of luck and success as you move on. As we search for new CFO, I'm very pleased to share that Joe Spirasio, who served as CFO for IMAX for nearly a decade, immediately pried to Patrick. is rejoining the company on a temporary basis as interim CFO. Most recently, Joe served as chief financial officer of Entertainment One. There he served under Darren True, CEO of E1 at the time and a longtime member of the IMAX board of directors. And Joe was instrumental in E1's $3.8 billion sale to Hasbro in 2019. Joe's knowledge and expertise with the IMAX business will help ensure a smooth transition as we complete our search for a permanent replacement for Patrick. Thanks again for all of you for joining us today. Please continue to do everything you can to stay safe and healthy. With that, I'll turn it over to Patrick.