AMC Entertainment Holdings, Inc.
Q4 2018 Earnings Call Transcript

Published: 1 Mar 2019

[Operator:]

Greetings, and welcome to the AMC Entertainment Fourth Quarter 2018 Earnings Conference Call. [Operator Instructions]. Please note, this conference is being recorded. I will now turn the conference over to your host, John Merriwether, Vice President, Investor Relations. Mr. Merriwether, you may begin.

[John Merriwether:]

Good afternoon. Thank you, everyone. I'd like to welcome you to AMC's fourth quarter and year-end 2018 earnings conference call. With me this afternoon is Adam Aron, our Chief Executive Officer and President; and Craig Ramsey, Executive Vice President, Chief Financial Officer. Before I turn the call over to Adam, let me remind everyone that some of the comments made by management during this conference call may contain forward-looking statements which are based on management's current expectations. Numerous risks, uncertainties and other factors may cause actual results to differ materially from those that might be expressed today. Many of these risks and uncertainties are discussed in our public filings, including our most recently filed 10-K and 10-Q. Several of the factors that will determine the company's future results are beyond the ability of the company to control or predict. In light of the uncertainties inherent in any forward-looking statements, listeners are cautioned to not place undue reliance on these statements. The company undertakes no obligation to revise or update any forward-looking statements whether as a result of new information or future events. On this call, we may reference measures such as adjusted EBITDA, adjusted income margin, adjusted free cash flow and constant currency, which are non-GAAP financial measures. For a full reconciliation of our non-GAAP measures to GAAP results, please see our earnings release and supplemental financial information issued earlier today. In conjunction with our earnings release, we encourage you to review the supplemental financial information for the 2018 fourth quarter and full year that we published this afternoon on the website. I would like to point out, there is an error in the table on the front page of the press release and the back page of the press release that was issued today. The adjusted free cash flow number for the fourth quarter of 2017 should be $211.5 million. The adjusted free cash flow number for the year ended December 31, 2017, should be $329.1 million. We are in the process of issuing a corrected press release and updated 8-K with the corrected numbers. After our prepared remarks, there will be a question-and-answer session. This afternoon's call is being recorded, and a webcast replay will be available in the Investor Relations section of our website at amctheatres.com later today. With that, I'll turn the call over to Adam.

[Adam Aron:]

Thank you, John. Good afternoon, everybody. I'm very glad you could join us for a review of AMC's fourth quarter and full year results and an update on several key items. Before I dive into AMC's record full year results for 2018, let me spend a minute talking about the impressive health of the movie exhibition industry generally. Simply put, 2018, as many of you already know, was a fantastic year for films. Movie after movie shattered attendance and revenue records this year. Movies like Black Panther, Avengers

[Operator:]

[Operator Instructions]. Our first question comes from David Miller, Imperial Capital.

[David Miller:]

Nice to see your stock marked up 6.5% here after market hours. A couple of questions, Adam. The -- with regard to the slight softness in Europe, is there any difference now in the scheduling? Or are there any changes to the scheduling that you guys plan on potentially IPO-ing the European portion on either London or euro next? Craig, I think you had mentioned that the time line last quarter was going to be late '19 or early '20. I'm just wondering if there's any change in that timeline. And then I have a follow-up.

[Adam Aron:]

First, thank you, David. First of all, congratulations on your new role. There was slight softness in Europe. A lot of it has to do with the FIFA World Cup. Some movies didn't translate as well in Europe as they did in the United States like Black Panther. Some of the domestic product, local language products in Germany nearly wasn't all that great this year. But we already made a comment on the last call about a European IPO. It's off the table for now. We do need to -- we think it's wiser to post strong operating results in Europe before we contemplate selling off 1/4, 1/3 of our European assets to investors and we'll get a much higher price. So there is no change in the schedule as compared to what we announced on last quarter's call.

[Craig Ramsey:]

Yes, David. I'd say we had -- what's moved -- what's changed though is really the emphasis on the cash flow generation, the changes that Adam talked about in his remarks to the capital deployment, the reduction of CapEx. And that really steps up our opportunity and ability to deliver going forward.

[Adam Aron:]

Yes. That, especially with the more moderate view of CapEx in outer years. But also, I should have mentioned in the first part of my answer, we're also seeing such staggering results in the financial returns on our recliner theatres. We also think that our current shareholders should reap the benefit of that EBITDA increase and the valuation that accrues to us from better EBITDA in Europe, from the recliner renovations in Europe. As I said in my prepared remarks, we're routinely seeing ROIs in excess of 50%. Before we give all that value to a third party, we'd like to give it our own shareholders first.

[David Miller:]

Okay. And then just a follow-up. I believe it was last year at this time that you guys were having problems with the renovated AMC Theatres versus the renovated Carmike theatres then, of course, within that, the non-renovated AMC Theatres versus the non-renovated Carmike theatres. Has that all been absolved now? Do you feel a lot more comfortable with those renovated Carmike theatres given the fourth quarter performance? Appreciate the questions.

[Adam Aron:]

Thank you, and yes. And let me set it in context. The -- you got to go way back. You did say last year, so I got to go way back in 2017. The circuit that was delivered to us in December of '16 was in an eroding position, and eroded throughout much of 2017. And we put the A-Team on it, and by September, October, we'd hit those -- we've hit the bottom and crested. And by October, November, we were starting to decline -- this is of '17, climb up and start to see good performance out of the entire Carmike fleet of theatres. What we said way back then because we're talking 15 months ago, is that some of the investment decisions that Carmike had made in renovating their theatres were -- before our ownership, were different decisions that we might have made ourselves. They put far more money in the Dine-In Theatres and far less money into recliner seating. And that the so-called renovated Carmike theatres in 2017 were similarly problematic for us in the acquired circuit. But we're talking 12 to 24 months ago. As we sit here today, I already said that we have turned around the whole of the Carmike fleet by the end of 2017. And the Carmike theatres that we renovated in 2018, we renovated with the kind of initiatives that AMC is quite experienced in. We were building -- we were installing recliner seating as we have done quite successfully. And actually, the returns coming out of the renovated Carmike theatres were quite appealing in 2018. They nicely met our 25% hurdle returns. And I mentioned that we did 58 theatres in 2018. 44 of them legacy AMC Theatres and 14 of them legacy Carmike theatres. What we're seeing from the results of the '18 renovations in the Carmike circuit, doing it the way that we know how to do it, making the decisions that are based on our own analysis, they were quite strong. And looking ahead, I think you're going to see more Carmike theatres getting renovated than AMC getting -- than legacy AMC Theatres getting renovated because the returns are so high. We're well down the road. We got 75% of the AMC Theatres now renovated. All but 14 of those are legacy AMC Theatres. But the low-hanging fruit is not deep in the cycle of the AMC Theatres. It's early in the cycle, the Carmike theatres. And that's where our CapEx moneys will primarily be going in the years ahead domestically.

[Operator:]

Our next question comes from Eric Handler, MKM Partners.

[Eric Handler:]

Two things I want to focus on. First, in Europe, particularly the U.K., it sounds like the renovated theatres are off to an excellent start. But I wonder if you can talk about the competitive dynamic. Last year was a near 50-year high in attendance in the U.K. There was definitely some U.K. films that overindexed quite nicely, which helped, but where your competitors, Vue, dropped price substantially and gained some market share that way. So you've gained a little market share, Vue gained some market share. Was it the middle ground that lost market share? Or do you not compete with you in certain markets? And how do you think about the -- some comparisons on a year-over-year basis in the U.K?

[Adam Aron:]

Sure. Look, Vue's pricing in the U.K. is insane. And they gain share from it theoretically, but it's not how we believe we should be competing in the United Kingdom. Fortunately, we have a different strategy. Rather than dropping price to questionable levels, we've chosen instead to compete on quality and value. And that's not just words, it's easy to say you're competing in quality and value. But we now have 20-ish theatres in the U.K. with recliner seating. I'm pretty sure we'll have another 20 in 2019. And we're getting enormous progress and seeing enormous progress in our U.K. network as a result of having improved the physical condition of our theatres, and that's how we're going to play the game in the United Kingdom. I think it's a much wiser strategy.

[Eric Handler:]

And then the follow-up to that was also going to be, when you look at the year-over-year film slate in the U.K. since it is your largest market there, you had a lot of theatres -- or the film content in 2018 was very U.K.-centric. How do you see that as you look at a year-over-year basis in 2019?

[Adam Aron:]

Well, look. Let's talk a little bit more broadly than just the U.K. If you look at all of Europe, Europe was soft in 2017 -- sorry, 2018. And we posted these results for global AMC that are making us smile even in the face of some weakness in Europe. Having said that, as we look at 2019, the slate that's coming on 2019 appears to be so strong that we're hoping for an up year in Europe, in the U.K. and across the continent. And that will just be gravy for us given that we posted strong results in 2018 on the strength solely of the domestic network.

[Eric Handler:]

Okay. And then one last quick thing. So your per cap concession spending in the fourth quarter in the U.S. was quite good, up 2.2%, which is a big reversal from the modest decline that you had in the third quarter. And you talked about, in the third quarter, how A-List had a little bit of impact because of that. What changed so dramatically in the fourth quarter that all of a sudden you get per cap spending back on a positive trend?

[Adam Aron:]

Well, first, I don't know the right way to say it. A-List is very new to us in the third quarter. We only launched it in June 26. We learned early that while the A-List spending per month is way up because of increased visits, the A-List spending per visit was not robust. We learned from that experience, and we marketed our F&B harder and better and smarter in the fourth quarter of 2018. And that's something that's going to continue to be a very high priority for us in 2019, with new menu items, more delivery to see, a lot more marketing activity, a few tricks up our sleeve I can't talk about on this call, because competition will learn about them too soon. And Craig wants to mention one more thing.

[Craig Ramsey:]

Yes, the other thing, Eric, we took our pricing action, the 2018 pricing action was really taken in kind of the late summer, and so we didn't affect really the third quarter that much. The price, food and beverage up 13%. The lion's share of that came from some late summer, early fall pricing that solely benefited the fourth quarter.

[Adam Aron:]

And I might add that we've also put in some price initiatives on F&B already this year in 2019, which had flowed through the P&L throughout the year as well.

[Operator:]

Our next question comes from Chad Beynon, Macquarie group.

[Chad Beynon:]

Firstly, I want to -- domestic margins, as you think about 2019, so outside of the rent adjustment that you all faced, that headwind in the first half of the year, are there any other reasons why the flow-through shouldn't be strong? I think we're all expecting revenue at the box office to be up, and that historically has led to somewhere between 40% and 60% flow-through. So outside of that rent, is there any reason why you shouldn't be able to get some margin expansion?

[Adam Aron:]

I think it's going to be a pretty good year. So let me put all the implication of lease accounting aside for the call when we walk you through it. Should about a pro forma basis, old accounting -- I'm sorry, old accounting or a pro forma basis, new accounting, so you have comparable stats year-over-year. Should feel like a very good year, with the caveat being the box office is going to be much stronger in the second, third and fourth quarters than the first. And whenever revenues are stronger, margins expand greater. So I think you should expect to see better performance in the latter part of the year as opposed to, say, Q1. Craig?

[Craig Ramsey:]

Yes, I'd add, Chad. Some of the headwinds we had in 2018 for the full year on EBITDA contribution margins, we had lower dividends. That will comp very comparably year-over-year 2019 versus 2018. A-List, we've talked about, that we see improvement that actually being a net contributor. So that should be improvement. A [indiscernible] was a piece that we'll have to contend with, but we have some things in store that ought to offset the benefit that we had in 2018 on that onetime lease incentive payment. So there's gives and takes, but I think net-net, we ought to see some margin improvement next year.

[Chad Beynon:]

Craig, on the share count, how are you guys going to be treating the convert, the 32 million shares there from a P&L standpoint? And is this 135 million shares? Is that the right number, kind of fully diluted with everything included, thinking about it going forward?

[Craig Ramsey:]

Yes. That has -- the 135 million has the -- for the quarter, and the 130 million for the full year, has the dilutive effects of the convert, which is what you've observed. Now certainly not as dramatic an impact on the full year because it wasn't outstanding for a full year. So the 135 million, yes, would probably be more indicative of the full year.

[Adam Aron:]

And we're about 103 million shares outstanding if, you set aside the convert.

[Chad Beynon:]

Okay. And then last one. Just for CapEx, the $250 million to $300 million, so I think you said before the maintenance number is really somewhere between $150 million and $180 million. So what would be the delta between the $250 million to $300 million in kind of a pure maintenance number? Is that just further reseats and just things from a technological standpoint that you're doing in the theatre? Why wouldn't that just reset down to the maintenance?

[Adam Aron:]

So you're right. Maintenance capital this year was $129 million. Of that $250 million to $300 million range, call it $150 million and $150 million. $150 million in maintenance capital and $150 million at the higher end of the range for growth initiatives. Look, we're still sitting on what we see as impressive opportunity to invest in our circuit and achieve high returns far in excess of our cost of capital. And sometimes, there are recliner seats. There are a whole host of other things we can do, including new-build theatres. We did sign a contract in 2018 that calls for 50 new theatres to be built in the next 4 years in the Middle East. 90% of the capital for those theatres coming from our partner. If those theatres go well, we could see that number of theatres double and technology is also a great opportunity for us. We've become a digital marketer now. 45% of our clientele are booking their tickets in advance online. That's all the strength of our website and smartphone app or apps, plural. So we got food and beverage opportunities galore. So we're never going to -- should never say never, but I don't ever envision growth initiative CapEx falling to zero. That would imply that there's no opportunity organically within the business to chase and actually achieve high returns. And as we look ahead, there's going to be a lot of opportunities still to get those returns, which should increase EBITDA, which should be beneficial to our shareholders. Having said that, we've been at this now for six years in the United States. It was 75% of our theatres already having been touched domestically. We don't have to invest at the same levels in outer years going forward as we've been in the last few years simply because once you do the big renovation, you're done. But there is considerable opportunity within our gunsights.

[Operator:]

Jim Goss, Barrington Research, please proceed with your question.

[James Goss:]

Ideally, with A-List, you would like the members to attend -- take out seats that would not be sold otherwise, I suppose. And I'm wondering if [indiscernible] as the uptake increases, are you getting any crowd out in peak periods where you might have sold some tickets at higher prices?

[Adam Aron:]

Your first premise is accurate. Of course, you'd like them to fill empty seats rather than block -- either fill full seats or block full-paying patrons. You know I'm an ex-airline guy. Spent 11 years in the airline industry. I know something about load factors. It is shocking how many empty seats we have in the movie theatre industry. We are not airlines that run 78% load factors. We are churches built for Easter Sunday that have empty pews on those Sundays. We're not seeing any evidence of significant disruption to our ability to sell tickets to full-paying customers.

[James Goss:]

Okay. And as the number of visits per month edges down a little bit, do you think ultimately, you got an improved film ramp margin rather than a challenge to it, as attendance moves to that lower level? But you have the higher revenues and maybe braced the costs?

[Adam Aron:]

I want to stay away from that conversation publicly, because we work so hard with studios to convince them that we are their partner, that we're interested in increasing the pie for everybody, rather than arguing about film rent splits between us. A-List is a program that clearly is driving incremental attendance as I said earlier, up 5, 6x. We're all making more money from this thing. And as for how it splits between the studios and AMC, I prefer that they handle that with our studios privately.

[James Goss:]

And since we're at the end of the line, I'll stop there.

[Adam Aron:]

No, no, no. We love you, you can finish, go ahead. What's your next question?

[James Goss:]

Okay, just one other one. You talked about the family-focused films working against ticket prices this year. And now this coming year, you talked about a lot of those tickets again that might not sell a lot of IMAX and 3D. Do you think that's another issue in terms of the average ticket prices is going on to the [indiscernible]?

[Adam Aron:]

Actually, I think it's going to be the opposite. I think some of these family-friendly films that are going to come out are going to be massive hits for IMAX and for that matter, for Dolby Cinema. Some of the animated films have been made for IMAX. I think are going to do very, very well. And I think we're going to be very glad that we are the largest IMAX exhibitor in North America. I think we're going to be very glad that we're the largest Dolby Cinema operator in North America. And the key to the family-friendly film comment was the former Carmike circuit played really well to G and PG product, less well to our product. And we've seen kind of a dearth of family-friendly product in -- certainly in '17. It improved in '18, but there's a lot more opportunity ahead. We got movies like Toy Story 4 and Frozen 2. And there are a lot of titles coming, Lion King, Dumbo. There a lot of movies coming out that are going to appeal to families in a big way. And that should help us across the entirety of our North American circuit.

[Operator:]

We have reached the end of the question-and-answer session. And I would like to turn the call back over to Adam Aron for closing remarks.

[Adam Aron:]

Thank you, Operator. Thank you, one and all. Look, we're obviously pleased about 2018. $929.2 million of EBITDA, is up $107 million year-over-year. That's a good healthy growth. The box office, it looks to be huge for 2019. A-List is a strong and successful program. This is all adding up to a good '18 and hopefully, a good '19. With that, thank you for joining us today. We'll be happy to take any of your further questions in detail on follow-up calls. Thank you, one and all.

[Operator:]

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