AMC Entertainment Holdings, Inc.
Q4 2017 Earnings Call Transcript

Published: 1 Mar 2018

[Operator:]

Greetings and welcome to the AMC Entertainment Fourth Quarter and Year-end 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Merriwether, Vice President, Investor Relations for AMC Entertainment. Thank you, Mr. Merriwether. You may begin.

[John C. Merriwether:]

Thank you, Devon. Good morning. I'd like to welcome everyone to AMC's fourth quarter and year-end 2017 earnings conference call. With me this morning is Adam Aron, our Chief Executive Officer and President; and Craig Ramsey, Executive Vice President, and 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 this morning. 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 will reference measures such as adjusted EBITDA, adjusted EBITDA margin, and constant currency, which are non-GAAP financial measures. For a full reconciliation of our non-GAAP measures to GAAP results, please see our fourth quarter earnings release issued earlier this morning. In conjunction with our fourth quarter and year-end earnings release, we encourage you to review the CFO Commentary for the 2017 fourth quarter that we published on our website in tandem with the earnings release. After our prepared remarks, there will be a question-and-answer session. This morning'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 M. Aron:]

Thank you, John, and good morning, everyone. Thank you for being with us this morning to discuss AMC's fourth quarter and year-end 2017 results and our prospects for success in 2018 and the years to come. From our perspective, this is a quarterly call laced with extremely good news. We posted strong results for Q4 of 2017, the early signs for 2018 are very encouraging and significant progress has been made on a host of important topics that concerned you and us throughout much of the year that we just completed. All are harbingers for prosperity for AMC in 2018 and beyond. Successfully serving guests in today's evolving entertainment landscape requires smarts and agility. It demands continuous reevaluation and the ability to pivot to meet changing conditions. In 2017, AMC did just that. We managed our business through the ups and downs of a volatile industry box office, which was record setting in some months, but fraught with challenge in others. We stayed true to AMC's innovative culture and we continued to take actions and to make investments to assure even better results in the future. From an industry perspective, the 2017 North American industry box office saw a year with bookend quarters of growth, a record ever first quarter and a huge fourth quarter, that was only but $29 million away from being the all-time best fourth quarter on record, admittedly juxtaposed against two weak quarters sandwiched in between. While you all have been trained to think of quarters, looking at 2017, it's better to think of the year in trimesters. The first four months of 2017, January to April, we're up a healthy 4.5% over a strong 2016. The last four months, September to December, we're up an even more healthy 5.4% over a strong 2016. But May to August was a slump, and that was big enough to push the entire year modestly downwards, down, as you know, about 2.5% when compared to full year of 2016. For all the drama, 2017 was the third-best year in cinema history. It very nearly was the second-best year in cinema history. And if you think about it, 2017 was just one tent pole film away from being yet another record box office year following two record-setting years before

[Operator:]

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Eric Handler with MKM Partners. Please proceed with your question.

[Eric O. Handler:]

Couple of things. Just first for modeling purposes, you say the U.S. box office, you expect to be up in 2018. Just curious how you think Europe might perform for modeling purposes? Directionally, do you think that's up and do you think it's equivalent to what we might see in North America? And then secondly, wonder if you could talk about what remains with your pricing initiatives as you head into 2018? And do we start seeing variability in pricing by section of the theater or what else you might be thinking of?

[Adam M. Aron:]

Thank you, Eric, and good morning. Look, industry demand is looking very, very positive at the moment. I would remind everybody that nobody could predict December industry demand for 2017 in November of 2017, so the fact that we are forecasting in February for the full year means that we'll see what actually happens. But we would not be surprised to see the industry box office be up 3% to 4% in North America for the year, which would push 2018 near record level. We would point out that in the UK, for example, which is 40% of our EBITDA generation in Europe, the industry box office demand was up 8% in the month of January, which was far faster growth than we saw in the United States. And they're playing to huge numbers for Black Panther in February over in Europe. So, industry demand looks quite bright in Europe as well. As for pricing, I'm really very proud of the actions that our pricing department has taken, looking backwards. Given the breadth of our circuit, AMC is now quite a sophisticated pricer. Our average price is considerably higher than several other major competing circuits, as many of you know. I was carefully schooled in my young 20s that it's probably a very bad idea to talk about pricing prospectively given any trust concerns. So, I'll refrain from making any specific comments about pricing. But let's just say that just as the company introduced major pricing initiatives in 2017, we would expect to introduce major pricing initiatives and innovations in 2018. And for that matter, again in 2019.

[Eric O. Handler:]

Okay. Thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Chad Beynon with Macquarie Capital. Please proceed with your question. Chad Beynon - Macquarie Capital (USA), Inc. Great. Thanks. And good morning. First question, just kind of on the back of your comments there, Adam, how should we think about margin goals for 2018? You talked about the $30 million of cost initiatives kind of coming through in the fourth quarter. So if you're able to hold costs where they are right now, how should we think about flow through or maybe the goalpost of margins for 2018 given the status of your outlook? Thanks.

[Craig R. Ramsey:]

Yeah. It's Craig. I'll respond. I'd go back to the comments we've made before that this business has operating leverage. And certainly, when you can manage down even some of your variable costs, that has a positive impact on margins. But we've said before, if we can grow our box office or our revenues in an industry that grows 2% a year, if we can get another 2% to 3% growth in revenues on initiatives, we ought to see margin expansion, we ought to see EBITDA growth 8% to 9%, and that should lead to 50 to 75 basis points of margin improvement year-over-year. And you may even get 100 basis points in a really strong box office year. So we would certainly expect that again in 2018, of course, depending upon the overall backdrop of the industry and the continued success of our growth initiatives.

[Adam M. Aron:]

We've said over and over again that this is a high fixed cost, low variable cost business. So in quarters where our revenues are growing, you should see somewhere between 50% and 70% of those incremental revenues flow through to the bottom line, bottom line being the EBITDA line. By contrast, if revenues are contracting, as they did in the summer quarter, with July and August, if we're deprived of an incremental dollar coming into the system, if revenues are falling, then we're going to be penalized 50% to 70% of that at the bottom line. That explains why we had a tough summer. That could explain why we'll have a very bright full year 2018 because as we look at the full year, we do believe this is going to be a revenue grower kind of year. Chad Beynon - Macquarie Capital (USA), Inc. Okay, great. Thanks. My follow-up is with respect to the CapEx guidance, and more importantly, where the circuit will be from a reseated standpoint at the end of 2018. As it stands now, what's the outlook beyond 2018 from a CapEx standpoint? And if the returns actually increase or remain where they are right now, should we expect additional reseating in 2019 later in the year? Thanks.

[Adam M. Aron:]

At some point, we will have completed our big thrust to reseat theaters. We're well down the road within the AMC circuit of having put in recliners at the theaters where they produce the highest returns. We bought two circuits, Odeon and Carmike, that had virtually no theaters where recliners were in place. So we do have about two more years ahead of us where, assuming the returns are robust, we will continue to invest in recliners and theater renovations. I do think you'll see actually increasing returns over current levels in those renovations in the Carmike and Odeon circuits because what we're seeing in the theaters that we've done recently just in the past few months at Odeon in the UK, for example, is that the investment returns from the recliners we're doing in Europe are producing returns far greater than what we're seeing as we're well down the road into the middle-third of having renovated the AMC circuit. We're seeing the kind of investment returns that we saw in the first-third of the recliner activity of the AMC circuit. Put another way, at AMC we did the lowest-hanging fruit first, which had superior returns. We're now doing the lowest-hanging fruit in the Odeon circuits and the Carmike circuits, and we're seeing outsized returns. Having said all that, at some point, we will be through this and the investment spending that we're making in our circuit can come considerably down. And I would expect that by 2020 or 2021, we'll be investing far less of our free cash flow back into the business, and we'll be able to report to you that we're retaining a much significant percentage of our free cash flow for other purposes as we see fit at the time. Chad Beynon - Macquarie Capital (USA), Inc. Okay. Thank you both and nice result for the fourth quarter.

[Adam M. Aron:]

Thank you, Chad.

[Operator:]

Thank you. Our next question comes from the line of Jim Goss with Barrington Research. Please proceed with your question.

[James Charles Goss:]

All right. I have a couple. The first one would relate to the pricing issue you were just discussing. I'd like to get a little more granular in terms of there's a comment in Craig's commentary that the growth in average ticket prices resulted from the increase in PLF and IMAX premium formats offset by 3D attendance. I'm wondering, on the PLF side, what share of your revenues are now accounted for PLF screens versus your footprint? And with the 3D side, wondering what the impact on average prices was from that and how much this trend will need to go to run its course in your opinion.

[Craig R. Ramsey:]

Yeah. Jim, give me just a second.

[Adam M. Aron:]

While he's getting the exact numbers, in round numbers PLFs are about 3% of our screens and about 10% of our revenues. The price premiums that we are seeing at IMAX and Dolby are almost always in the plus 70% or higher range. We now have 10 AMC Prime PLFs, our in-house private label brand that we told you about a year ago. They are seeing 30% to 40% price premiums, which is very encouraging to us because they really might be called premium almost large format screens. They're more of our medium-sized screens.

[Craig R. Ramsey:]

Yes.

[Adam M. Aron:]

Those numbers are continuing to be robust. We're adding a lot of PLF screens. I said in my earlier remarks, up double-digit percentages in 2018. 3D was down considerably in 2017 with the kind of $3 to $4 price premium that we were getting for 3D. What's interesting so far in 2018, 3D was considerably down in January and the first half of February, and then we opened Black Panther and our 3D revenues were very strong for the Black Panther title. So I think you're going to find out that at PLF we're strong across the board and 3D is going to be a title-by-title issue.

[Craig R. Ramsey:]

Yeah. On kind of on your concentration question, if you combine the IMAX and our Dolby premium format into a group in 2017, and on the domestic side it's about 10% of total revenue compared to about 8.5% last year. So it's box office and we're growing the Dolby premium format circuit, and to a certain extent we're continuing to add IMAX locations as well, but Dolby is probably the bigger growth factor there. 3D for the current year right at about 10% in total of revenue. So that's how it breaks out.

[Adam M. Aron:]

And I just want to make a quick comment about Dolby and IMAX. We're the largest PLF theater circuit in North America. We're the largest PLF theater circuit in Europe. We will be growing both our IMAX locations and our Dolby locations. We are very closely aligned with Dolby Labs and with IMAX. We continue to be huge partners with IMAX, huge partners with Dolby Cinema. We couldn't be more excited about our partnership with each, and we do intend to grow with each in the U.S. and in Europe.

[James Charles Goss:]

Okay. Thanks for that. And the one other question related to film rents. I can appreciate your ability to bring the Carmike screens into your platform should help on the film rent margins for those former Carmike screens. But I'm wondering if the increased scale also gives you enough bargaining power with the studios that your overall potential to have improved film rents is enhanced.

[Adam M. Aron:]

So as you saw in our reported numbers for 2017, our film rent costs were coming down for the company, which is good news for us. But I want to also remind you that that comes from two components

[James Charles Goss:]

All right. Thanks very much for both.

[Craig R. Ramsey:]

Thank you, Jim. Nice to talk to you.

[Operator:]

Thank you. Our next question comes from the line of Mike Hickey with The Benchmark Co. Please proceed with your question.

[Mike Hickey:]

Hey, guys. Congrats on the quarter. Thanks for taking my questions. I guess, Adam, under the dragons and demons category, I didn't hear you mention MoviePass. It sounds like they're being a little bit more combative here in terms of how they migrate their subscribers potentially around some of your networks. So just curious for your thoughts there and any impact you might see in Q1 from those actions.

[Adam M. Aron:]

They weren't in my script for a reason. We're focused on running our business, not running their business. As you saw, we had a very good fourth quarter with MoviePass's existence. You saw our press release about our revenue performance at BLACK PANTHER where we shattered records all over the place. We had one AMC theater in Atlanta that showed Black Panther 83 times on the opening weekend. Incredible. We're doing great with or without MoviePass. Our view of MoviePass has not changed from the very first day. We think it's a great concept. We think their price point is unsustainable. We've released data for prior months that will give you the January number. Our records indicate that several hundred thousand of their subscribers showed up at AMC theaters. They did so an average of 2.7 times each. They paid us approximately $11.90 per ticket, which means that MoviePass paid us in excess of $32 per subscriber that showed up at an AMC theater where they were charging $995 a month. We don't see how those numbers add up. But as I said, we're focused on running our company, not running theirs.

[Mike Hickey:]

Fair enough. Thanks. I think you said you were sort of positive I guess maybe on the concept, not the words you used, but I think you obviously or probably you don't want to talk about pricing too much as you noted before. But how do you think about the subscription plan? Obviously, one of your peers created something similar perhaps at a pricing that's more sustainable. But sort of your thoughts there on possible introduction of the subscription plan within your network. Thanks.

[Adam M. Aron:]

Yes. It's exactly what I said to Eric. I was schooled to talk about pricing actions after you've taken pricing actions, not before you take pricing actions because some people think that's signaling the competition. So, if and when we ever offer some competitive product to Cinemark or MoviePass, we'll talk about it then but not today.

[Mike Hickey:]

All right. Fair enough. Last one for me I guess. Could you remind us your scale objective for recliners in Europe? And I'm also curious what you're seeing in terms of reserved seating within the European markets. Obviously, you have scale here domestically, but sort of wondering what do you see in Europe. And perhaps any influence that's having on your concession business or otherwise? Thank you.

[Adam M. Aron:]

Sure. Look we've identified over 100 theaters throughout our European network where recliner seating should produce dramatic returns for us. 7 down, more than 93 to go. And as I said in my remarks, we're moving 100 miles an hour to introduce these recliner upgrades and overall theater renovations in Europe because the initial returns are so encouraging. If you saw the data we're seeing, you'd be rushing to put out more of these theater renovation projects in Europe as well. As for reserved seating, reserved seating is very common in Europe. It's not done at all of our theaters, but it's done at a huge percentage of our theaters in Europe already. That's an area where Europe has been ahead of the United States in many respects. So, I think you'll continue to see us move forward with reserved seating theaters in the United States and reserved seating theaters in Europe.

[Mike Hickey:]

Thanks, guys.

[Operator:]

Thank you. Our next question comes from the line of Michael Ng with Goldman Sachs. Please proceed with your question.

[Michael Ng:]

Great. Thank you very much for the question. Given that AMC expects to recline a similar amount of screens in 2018 as it did in years past and the net CapEx outlook is coming down, does that imply that the cost to recline in Odeon and Carmike is lower than the legacy circuit? And if so, could you just remind us what the cost to recline in the legacy circuit is and how that might be different for Odeon and Carmike?

[Adam M. Aron:]

Yes. You're right, Mike. Costs are coming down to recline in the Odeon and Carmike circuits. Landlord contributions continue to be very high, which is helpful. Beyond that, as we go to some of the medium-sized theaters, we're looking at focusing our energy in the theater with recliner seats only as opposed to full soup-to-nuts renovations. At many of the Carmike theaters the public spaces were already in great shape and the public spaces did not need renovation, but they neglected to put in recliner seats, so they didn't quite finish out the theater renovation project. So, we are seeing a lighter approach to CapEx. I would say that our initial projects in Europe, the theater costs are either the same as they were in the states or less with the sole exception of the Odeon Leicester Square which is such an important theater in Europe. It currently has about 2,000 seats. It's, I guess, what you would call London's equivalent of Times Square. We believe profitability is going to soar at the Odeon Leicester Square as we turn it into the most beautiful theater in Europe. So, yes, on average, I think our cost to implement these renovations are coming down.

[Michael Ng:]

Great. Thank you. And it was encouraging to see that AMC exceeded its original goal of $30 million of incremental EBITDA in the second half from cost savings and other initiatives. Can you talk a little bit about where those numbers are? Where those better than expected savings are coming from? And also, international SG&A was very low in the quarter. Is that sustainable? And should we continue to see the incremental $30 million in first half of 2018? Thanks.

[Craig R. Ramsey:]

Yeah. Let me go backwards and talk about the international. There was some reclass of cost between operating and G&A on the international front in the fourth quarter. So, that's kind of what drove the G&A down was some reclass that was a little bit of a catch-up for the year. And so, that's probably not run rate. But net-net, and I think the more important point is, we did see the really strong EBITDA performance from international. So, it was just shifting cost between the two categories. As it relates to the total, your question about we got the $30 million, where did it come from, the big chunk of it, more than half was cost and that's split between the theater level where we really focused on operating hours and our scheduling and our G&A overhead. Corporate office, we took some action there on head count and deferred filling up some positions and things of that sort. But I don't want you to think it was all cost saving. There was an element in our $30 million target for revenue as well, and it wasn't half. So, a little less than half, but we did succeed in some success on the revenue front in the fourth quarter that will feed the 2018 numbers as well. The point I'm trying to make is it wasn't all cost savings, less than half of it but there was some revenue generation as well.

[Adam M. Aron:]

I'm going to say one thing. I so vividly remember the second quarter conference call of 2017 where some of you beat us up on our costs in Q2, and we told you that we had gotten religion and indeed we did get religion because look at the results first in Q3 and then increasingly in Q4. But even if the revenues improve in 2018 as we expect, we do think that the work the company did to be mindful about its cost structure is extraordinarily important work. And we intend to tightly manage our costs going forward. We also intend to rethink our cost structure. We think it would be in our interest to make some of our fixed cost more variable so that they can slide up and down as needed with levels of demand. So, as an interesting observation, for example, in the United States our so-called AMC Classic brand is about a third of our theater count but only 10% of our EBITDA. And we know with interest that about 40% of the theater leases within our AMC Classic brand come up for renewal over the next 36 months. We will be working quite diligently with our landlords to see if we can't convert a lot of those fixed price leases into variable leases where the returns to landlords are a percentage of revenue rather than fixed price per square foot. And so, we are thinking very hard about our cost structure and taking actions to make sure that we're well positioned for the future.

[Michael Ng:]

Great. Thank you, both. And just a quick housekeeping question, could you just make a comment about what drove the other revenue strength in the quarter? Was it just online ticketing fees or was there something else? Thank you.

[Adam M. Aron:]

A lot of it is online ticketing fees. We are so glad that we made the investment in 2016 to introduce the new website and new smartphone app. The numbers coming out of the new website and the new app have been great from the days of the week that they were launched. Black Panther opening weekend, for example, our online ticketing fees tripled year-over-year. You can't assume that will be the case all year long for all titles, but it was fairly encouraging two weeks ago. Anything you want to add, Craig?

[Craig R. Ramsey:]

No. It's an important part of other initiatives that we're trying to drive as well where, for example, on our food side of our business, we want our guests to be able to buy their ticket and order their food ahead of time. So, it, yeah, drives more other revenue, but it also is a critical part of a number of other initiatives that we're launching.

[Michael Ng:]

Great. Thank you, both.

[Operator:]

Thank you. We do have time for one final question. That question comes from the line of Aaron Watts of Deutsche Bank. Please proceed with your question.

[Aaron L. Watts:]

Thanks, guys, for squeezing me in here. Adam, appreciating your commentary around the returns you're seeing on your renovation and reseating initiatives and preference to direct free cash flow to that effort. I know one of the biggest concerns I hear from my seat is on the current leverage of the company. To the extent you're able to sell non-core assets, as you discussed, or move forward with the monetization event in Europe, what are the priorities for those particular funds? In the spirit of, maybe, speeding up the deleveraging process, would paying down debt maybe move up in the pecking order there?

[Craig R. Ramsey:]

Aaron, it's Craig. I'll start with it. If you look at the numbers, as you get into them between the end of September and the end of December, you'd see that we actually did pay down some debt. And because of the increase of our EBITDA, we actually had a positive impact on leverage as well. Adam did say in his comments, and I'd reiterate it, that as long as we're driving the kind of returns out of the recliners that we're seeing, particularly now that we're moving to the early stage of Carmike and the early stage higher return opportunities for both Carmike and Odeon, that's the preference. But we are mindful of the need to bring our leverage down. We took a step forward with that in the quarter, the fourth quarter 2017. And we'll look at the opportunity going forward as we monetize assets. We talked about the UK opportunity that we're studying, haven't concluded yet, but we're looking at. All of that will be – we'll look at opportunities to pay down some debt, but I'd have to say the preference, as long as we're driving EBITDA growth as we are, the preference for free cash flow is to reinvest in the circuit but to maintain a very moderate level of payout on our dividends. And so, there's a balance there.

[Adam M. Aron:]

And you're hearing Craig sort of trying to walk the line of the balance of our capital allocation strategies because as I said in the earlier remarks, we want to invest in our theaters, we want to deleverage, and we want to return cash to shareholders. And the decision that we made to buy almost $50 million worth of stock in the last four months of 2017, I suppose it was money that we could use to pay down debt, instead we chose to buy $47.5 million worth of stock, which we think was a smart decision for our shareholders. We continue to have three objectives with respect to capital allocation. Invest in our business to drive growth, return capital to shareholders. Our dividend was very high as a percentage of our share price, and you saw we reaffirmed our dividend without change at our most recent board meeting. But I do want to state very clearly, deleveraging is a major and important goal for AMC. We do intend to return the leverage level of this company back down about 4 times, which is a level where we're not uncomfortable with our current leverage because we got so much coverage above our interest expense, but still we would be much more pleased if our leverage level was between 3.5 and 4 times, and that is our objective over the next couple of years, to get it back there over the next couple of years.

[Aaron L. Watts:]

Very helpful. Thanks, guys.

[Operator:]

Thank you. I would now like to turn the floor back over to Mr. Aron for closing comments.

[Adam M. Aron:]

Thank you, operator. Thanks everybody for being on the call. When I think back on 2017, it was a roller-coaster year, but I am reminded of AMC's steadfast confidence throughout the year in both the industry and in our company. We celebrated records, we weathered storms, our confidence remains high. It's bolstered by a solid fourth quarter and a much better start to 2018 than anyone would ever have predicted. As we have said before, when Hollywood tells great stories well, moviegoers head to our theaters and they do so in huge numbers. Thank you, one and all. We look forward to seeing you sometime soon in person.

[Operator:]

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