AMC Entertainment Holdings, Inc.
Q4 2019 Earnings Call Transcript

Published: 27 Feb 2020

[Operator:]

Greetings. Welcome to the AMC Entertainment Fourth Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. And this time, I’ll turn the conference over to, John Merriwether, Vice President of Investor Relations. Mr. Merriwether, you may begin.

[John Merriwether:]

Thank you, Rob. Good afternoon. I’d like to welcome everyone to AMC’s fourth quarter and year end 2019 conference call. With me this afternoon is Adam Aron, our President and Chief Executive Officer; Craig Ramsey, Executive Vice President and Chief Financial Officer; and Sean Goodman, Executive Vice President.

[Adam Aron:]

Thank you, John. Good afternoon, everyone. I'm very pleased you could Craig Ramsey and me today. I'm also delighted to formally introduce you to Sean Goodman. Sean has been with us since December and has been working to ensure a smooth and seamless transition of the CFO responsibilities. As you will soon learn, Sean is a very smart and worldly fellow. We're excited to have him on board and I greatly look forward to working together with Sean to create value for all AMC stakeholders in the years ahead. I want to also take this opportunity to express sincere gratitude and appreciation to Craig for his 25 years of outstanding service to AMC. He will be retiring on the 29th of this month, just two days from now. And Sean will formally take on the CFO title at that time.

[Sean Goodman:]

Thank you, Adam. I'm honored and excited to be on this truly exceptional team. Turning to the financial results for the fourth quarter, AMC’s seventh consecutive quarter of industry outperformance. Our consolidated results with variance to last year's fourth quarter calculated in constant currency are as follows

[Adam Aron:]

Thank you, Sean. As you just heard we had a successful fourth quarter where AMC solidly outperformed the industry yet again. These results are directly tied to the continued commitment to innovation in the AMC platform through which we deliver a personalized and targeted end-to-end experience for our guests leveraging technology and data driven insights that all drive consumer loyalty. We believe that AMC is blazing a unique trail in creating nothing less than the quintessential 21st Century movie going experience. Before turning to your questions, I'd like to comment on eight important specific topics. First, on the attractiveness of the industry box office looking ahead. As I said a few minutes ago, globally the 2019 box office hit an all-time record high. Much has been written that the domestic box office may face challenges this year in 2020. That may be true. But some have tried to draw conclusions out of potential short-term softness and argue that this is due to a secular decline in out-of-home movie going. We could not disagree more strongly. As we look ahead, especially to 2021, we see dramatic growth in the size of the domestic box office not so far away. When the 2021 box office eventually is reported, we believe it will be the pessimists and the naysayers who will turn out to have been wrong. You will recall that as recently as 2017, some were writing the obituary of theatrical exhibition only to find that 2018 was the biggest domestic industry box office ever and 2019 was the biggest global industry box office ever.

[Operator:]

Thank you. We’ll now be conducting a question-and-answer session. Thank you. Our first question is from the line of Eric Wold with B. Riley FBR. Please proceed with your question.

[Eric Wold:]

Thank you and good afternoon. Just a quick question on the, the capital allocation plan. Obviously, you know Adam you talked about you the reduction of dividend can be deployed towards shared purchases and a decrease of debt. Maybe some thoughts on how that decision is made between those two uses and kind of how do you priorities those two?

[Adam Aron:]

Sure. Eric. Actually I think it was your report that first suggested that we switch from dividends to buybacks I might add. Look we've been returning $80 million a year in dividends. We're going to continue to pay out dividends admittedly at the lower rate. It generates right around $70 million annually $72 million, should the current new dividend rate continue unchanged, essentially that by itself would fund the share buyback authorization that we announced. But in terms of deciding between returning cash to shareholders, well, let me just keep going a second, we also to build up cash on the balance sheet therefore increase or decrease the net debt, therefore improving our leverage ratio. We are bringing our CapEx expenditures way down as you know some between $110 million and $135 million comparing 2020 to 2019 that allows us to deleverage significantly. In the prior years there were some assets that we were able to sell and monetize in cash. I do believe there’s some opportunity for us to continue to do that in 2020 when we look at the share price and see that our assets are being valued at less than 7 times EBITDA, its seems pretty low to us. Some of the items under our control are worth far more than that. So all of these things are in our sights in terms of priorities, it's very clear. Priority one is to deleverage and we are all doing that through reduced capital expenditures and the possibility of a small amount – a modest amount of asset sales. I don't want anything anybody to think we do anything big. Then also I would say next priority is to continue to return cash to shareholders and I will choose to do that more through share repurchase than through dividends especially with the uncertainty in the world today with the uncertainty in the markets in the last three days now is a good time to be adding cash to the balance sheet. And that's what we intend to do above all of.

[Eric Wold:]

Perfect. If I might real quick unstuffed deal us one follow up target. And you had that in place for almost two years. Can you talk about what you see with kind of the less than active users, did they tend to stay on for the most far seeing you churn away from people who don't use as much and then with that. What is your thoughts on the ability or need to take additional price increases?

[Adam Aron:]

Sure, so A-List has been in force for 20 months. As I said in the call it like that was more successful than we ever hoped it could be right out of the chute. Membership counts were higher, profitability was faster. You may recall a long time ago we said we thought by year end we would get $3 per member per month right about what's happening these days. The average if you look at churn which we look at very carefully the average A-List member looks like they're going to stay with us for at least three years, turns pretty low, logically the people who would fall off most are the people who are inactive, that’s kind of a logical thing. But we have been replacing those departing payless members with more new members so our membership counts keep growing rather than shrinking. There is no compelling need to take a pricing action. I remember we've already set three different pricing regions across the United States. We intend to be judicious in how we price the program. I do think there's an opportunity in some markets or in some states to take the price up. There are a couple of other really interesting levers that we can pull that will affect the program profitability a lot that don't require a price increase. For competitive reasons, I don't actually want to articulate what they are in this phone call. But there's one decision by itself that could improve A-List profitability by at least $10 million possibly more on an annualized basis. And we started testing in several markets quite quietly, various approaches surrounding that decision to see how they play with consumers. So I'm going to leave you with a bit of mystery on because I don't want to tip our hand. But as I said, we are constantly living this program, proactively managing it, looking at all sorts of ways in which we can generate increased value from it. We separated AMC A-list members into deciles based on their activity, their frequency, their food and beverage spend, we're putting different promotions out to different people based on their activity it’s just trying to stimulate the activity that they could spend more with us not trying to dilute activity where they're already spending a lot with us. If there is one thing this company ever did well, ever in its 100-year history, and this is our 100th year by the way, 2020 is our 100th anniversary ALS might be the hit, of all hits.

[Eric Wold:]

Thank you.

[Operator:]

Our next question comes from the line of David Miller with Imperial Capital. Please proceed with your question.

[David Miller:]

Yes. Hey, guys. Great results. Congratulations there. Sean, a couple questions for you and Craig maybe you want to chime in just because I know you have this background obviously. When we look at your capital structure the net debt to EBITDA you know is what it is and it's, it's recorded you know efficiently and I get it that there is some inefficiencies with the way it's being recorded by the wire services, but the, the net debt to EBITDA ratio looks invariably much higher when you count in the converts, when you count in the $600 million convert. And the problem with that convert is that it's busted and it's way below money. So what if anything can be done about renegotiating the terms of the convert. And then specifically as a separate question, I think Craig maybe it was about a year-ago, you mentioned that you would consider a European IPO on either Euronext or London, if there was consistency with the European results which there has been I think that's three quarters in a row of European outperformance. So you know a European IPO at least by my account which it is disarrayed any criticism that you guys would or our guys are over leveraged and I'm wondering what flavor you had in tackling that at this point? Thanks very much.

[Adam Aron:]

Dave, it is Adam. I’m going to field both. On the issue of Silver Lake convert, I would remind everybody that while it stays debt, there’s an interest rate of 2.95%. And if it converts to equity, as far as the public shareholders of AMC are concerned, well you know it was issued at $18.95 I believe it could drop into the 14th if we stay low the share price stays low. I defy anybody in this call to be unhappy if management was able to raise significant equity at north of $14 a share when our share price was trading at $6. We're aware that there may be an opportunity to renegotiate the terms of convert. We would only do so if we could do so on terms that were attractive to AMC and beneficial to AMCs public shareholders. On the issue of a European IPO, we did raise that issue about two years ago. I think we put that -- you are correct that if we sold off a lot of our European assets, we said a European IPO might be selling off essentially a quarter of Europe that that would prove to the world that it's ludicrous, that our European theater assets are being valued at under seven times EBITDA. But there are other ways to make the same point. And I also said I think six to 12 months ago on one of these calls that the results of our recliner renovations in Europe are so high, realizing that we now have 40 theatres done and we're going to have 60 theatres done by yearend 2020. Right now we think it's smartest for our current shareholder base to reap all of the increased shareholder value that accrues from those recliner renovations going into place. And that it would be unwise to give away a quarter that upside to the European public. So for the moment it's off the table. We do think there are other ways to prove to one and all that some of our European theaters are worth a lot more than less than seven times EBITDA. But we don't think we should be selling the whole European state to do so.

[David Miller:]

Okay. Thank you.

[Operator:]

Our next question is from the line of Chad Beynon with Macquarie. Please proceed with your question.

[Chad Beynon:]

Hi good afternoon. Thanks for taking my question. So 2020, I think you know most prognosticators are looking for domestic admission revenues to be down mid-singles or maybe even slightly worse. So if you guys can continue to gain market share and obviously benefit from the cost cutting plan that you put in place and that we saw a nice large improvement in the fourth quarter domestically. Can you help us think about margin potential as you've laid out before for 2020 if that is the scenario that ends up playing out. Thank you.

[Adam Aron:]

Thank you, Chad. Look here, in a nutshell right. We've got three vectors at work – and four vectors at work in 2020. We've got solid growth in Europe and the Middle East. We've got market share gains in the US which we hope to continue. And we have all the help from the Profit Improvement Plan which I increasingly in confident – I am increasingly confident that not only will we delivery on our goal that we will exceed our goal. The fourth factor is the domestic box office could be soft. In an ideal world the sum of the three first vectors would fully offset the fourth vector, but it’s only February 15 and it's too early to tell.

[Chad Beynon:]

Got you. Thank you. And then separately just back on the share repurchase announcement, are there restrictions in terms of how much you can purchase per day or per week just given the volume. I guess, as a percentage of the daily flow and how did you balance them?

[Adam Aron:]

I think it's 25% of the last two weeks trading volumes is what we can buy in a single day or (inaudible) little bit.

[Chad Beynon:]

Okay. Perfect. Thank you very much, guys. That’s from myself.

[Adam Aron:]

And then you’re going to say I cut you off, I didn't mean to. And you were saying how do we think about something rather?

[Chad Beynon:]

Well, I was just going to say how did you think about repurchasing opportunistically versus doing kind of a standard Dutch tender out in the market?

[Adam Aron:]

I think our preference is to do a purchase up opportunistically based on share price at the time. Doing this gradually might be better than shooting out wide all the single also by doing so opportunistically we get to decide the timing of our buys. We’re going to -- we certainly clearly are buying back stock – or I’m sorry, we clearly would have done today in a quiet period. We clearly will be buying back stock, but as for the timing of that stock repurchase, debt reduction lowering -- increasing our net debt, increasing our cash to reduce our net debt, decreasing our leverage ratios deleveraging is still our single top priority. And especially right now, when there is real uncertainty in the world, we're going to be conservative and keeping cash in our pockets to make sure that the -- what I think might be somewhat irrational fears the market has had over the past few days. I don't out -- don't turn out to be rational fears. Having cash in our pocket would be a good thing. But you know deleveraging first, share repurchase second, both will happen. Go back to the Investor Day from April of 2019, nothing has changed with respect to our aspirational targets. We laid out a three to five year road for AMC to go down in which deleveraging was a major strategy for the company. Margin improvement was a major strategy for the company. Revenue growth was a major strategy for the company. That is still our view of where AMC will go in the years ahead.

[Chad Beynon:]

Thank you, Adam. Appreciate it.

[Operator:]

Thank you. We're nearing the end of our question-and-answer session. And time for one additional question which is coming from the line of Meghan Durkin with Credit Suisse.

[Meghan Durkin:]

Hi, guys. I wanted to get a little more color on the Italy impact. Revenue and EBITDA contribution from those theaters, how many screens are closed? Why did you decide to close for one week? And what types of the evaluations will you be doing before you open the theaters again? And then just one last is what protections do you have if there is a more prolonged closure, is there insurance or something like that?

[Adam Aron:]

Well that's about 90. I mean we adore you, it’s about 19 questions in it. We have 47 theaters in Italy. We've closed 22 of them for all in in Northern Italy generally around Milan. There are another seven in north eastern Italy where the local government is going back and forth three times in the past 48 hours where they want us open and close, the – in – back in Milan, there are already a lot of entities in Milan that have reopened to the public. There is an increasing view of Milan, in Milan that there may be an overreaction in and around Milan. We tried to close for a week because that's what all the local governmental authorities and local medical authorities thought was the right thing to do. Milan and its environs are not on a quarantine and/or a lockdown. We did this cooperatively with the local governments just as a precaution in terms of the economic impact, it's de minimis, it’s – if the only issue is that those theatres in Italy are closed for a week. It's between $0.5 million and $1 million for a week's closure, that's not even going to be noticed, but when we wrap up AMC for the year. The issue might be if it scares moviegoers elsewhere in Italy or elsewhere in Europe. If it causes people to return to theaters slowly after the theaters reopen. But it’s way too early to start prognosticating what’s going to happen. Right now we have a few handfuls of theaters that are closed, there they're smaller theaters in general economic impact is really low. And now you know we don't we're not being Pollyanna. I raised the issue in my script on the call, if the coronavirus were to hit the United States in a huge way like that would be a problem for us. But what's happened in Milan is not. And as I said, as we assess where we are today, as you look at our circuits broadly across 1,000 theatres, there is little or no impact. I should say that we do not have business interruption insurance for the coronavirus, so that that is not a protection that is currently available to company. Look, I tried in my prepared remarks to be calm about coronavirus. Right now AMC is in a very good place, let's hope it stays that way.

[Meghan Durkin:]

Okay, thanks. And my best to Craig.

[Adam Aron:]

Oh, thank you.

[Sean Goodman:]

Thank you very much.

[Adam Aron:]

Meghan, everybody -- that's a nice way to end the call after 25 years, everybody's best to Craig.

[Meghan Durkin:]

Thanks.

[Operator:]

Thank you. At this time I'll turn the floor back to Adam for any closing remarks.

[Adam Aron:]

So I said all I had to say before folks. I just put my money where my mouth is. I just signed on to a $1.6 million pay cut over the next three years to take AMC securities that will have no value until our share price crosses $12 or $16 or $20, $24, $28 and $32. I personally own 459,833 shares of AMC stock today. We believe the future. I haven't sold a single share in the four years I've been here and I’m maybe acquiring a lot more. I think our future is enormously bright. I think the pessimists who have been doubting us over the past year but especially in the last six months and three months, I think they're just flat out wrong and all in our managed team is out to prove them so. So we will do everything humanly possible to deliver results at AMC as we did in the fourth quarter and we know that – all the talk in the world isn't going to matter the only thing is going to matter is do we deliver results. We are very much committed to doing so. We have done so and we will all see together the fruits of that labor. With that, we thank you for joining us and for staying with us late on a Thursday night especially in the East Coast and I will adjourn the call.

[Operator:]

Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.