AMC Entertainment Holdings, Inc.
Q1 2016 Earnings Call Transcript

Published: 30 Apr 2016

[Operator:]

Greetings. Welcome to the AMC Entertainment First Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, John Merriwether, Vice President of Investor Relations. Thank you, Mr. Meriwether. You may now begin.

[John Merriwether:]

Thank you, Rob and good morning everyone. I would like to welcome you to AMC’s first quarter 2016 earnings conference call. Before we get started with our prepared remarks, I would like to remind everyone that as referenced in our press release issued earlier this morning, we have posted a CFO commentary on the Investor Relations page of our website at amctheaters.com. I would also like to remind you that some of the comments made by management during this conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Forward-looking statements are subject to risks, uncertainties and assumptions and are discussed in our public filings, including our most recent 10-K. Statements made throughout this presentation are based on current estimates of future events and the company has no obligation to update or correct these estimates. Listeners are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainty and that actual results may differ materially as a result of these various factors. In addition, comments made on this call may refer to certain measures such as EBITDA, adjusted EBITDA, adjusted EBITDA margin, free cash flow and adjusted diluted earnings per share, which are not in accordance with GAAP. However, management believes these results more clearly reflect the operating performance. For a full reconciliation of our non-GAAP measures to GAAP results in accordance with Regulation G, please see our press release issued earlier this morning an furnished as an exhibit to our Form 8-K dated April 29, 2016, which is located in the Investor Relations area of our website at amctheaters.com. After our prepared remarks, there will be a brief question-and-answer session. Joining me on the call today are Adam Aron, CEO and President and Craig Ramsey, Chief Financial Officer. I will now turn the call over to Adam.

[Adam M. Aron:]

Thank you John. Good morning everyone. Thank you for joining us. Today marks my 117th day on the job leading the AMC team. And I can't remember a more exciting 117 days in my professional career. I have had the opportunity to immerse myself in all things AMC and the exhibition industry, having spent countless hours with AMC's talented headquarters executives and staff, as well as, our theater managers; having visited with our Hollywood studio partners on six different trips; having met with our largest shareholder Wanda in China twice; and having numerous interactions with the CEOs of IMAX, Dolby labs in RealD 3-D; all designed to advance the prospects of AMC's future. We have thought through several marketing and theater initiatives, which are sure to increase revenues, and importantly have announced an agreement to acquire Car-Mic cinemas to becoming largest movie exhibitor in the world. On the personal side, I have attended the Golden globes, the NAACP image awards and the Oscars. At which we enjoyed seeing Open Road films of which AMC owns 50%, and I serve as co-chairman, win the best picture Oscar for Spotlight. I met with the CEOs of dozens of movie theaters circuits from around the world, not to mention experiencing my first CinemaCon convention. It has been a whirlwind four months. By the way, as the most brilliant generals know when to make the smartest of strategic retreats, while it is still important for theaters to innovate. So as to make movie going more popular among millennials, AMC carefully listened to our customers and within 36 hours of launching a trial balloon, quickly determined that there will still be no texting in any of our AMC theater auditoriums. John, Craig, and I are pleased to be with you today to provide a brief overview of our record-setting start to FY16 and share with you some highlights and updates, since we last spoke with you. Of course Craig Ramsey, my executive partner and CFO is joining me on the call today morning and after my formal remarks, he and I will be happy to take any questions that you may have. The pace that AMC set in 2015 continues in 2016 and we are off to an incredible strong start to the year. Once again, AMC continued to set records in the first quarter of 2016. We established new first quarter or all-time benchmarks for record revenue, record adjusted EBITDA, record adjusted EBITDA margin. In addition, to numerous record average ticket price, food and beverage per patron metrics and all-important key gross profit indicators. As you can see from our press release, total revenues in the first quarter increased 17.3% to $766 million, and adjusted EBITDA grew 26.6% to $146.5 million. However even more impressive than that, you may remember that in last year's first quarter AMC recognized a one-time $18.1 million gain related to the termination of the post retirement health benefit plan. After excluding this game from the prior year's first quarter, the growth in 2016 first quarter adjusted EBITDA compared to last year is a stunning 50.1% year- over- year. We thought hard about what adjective to use here

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Eric Handler with MKM Partners. Please go ahead with your question.

[Eric Handler:]

Thank you very much for taking my question. Craig, wonder if you could sort of dissect a little bit on the average ticket prices. I know, obviously, last year you had the benefit of tax on top and while you still have that, it is anniversaried, but I wondered if you could talk about what level of ticket price growth did you see from premium, what did you see from just average ticket price growth? And then, secondly, what was premium as a percentage of overall sales versus last year? And then, also, wondered if you could talk a little about Starplex, the integration there and I also believe that they have a number of discount theaters, long term. Do you want to keep those discount theaters? What do you do with them?

[Adam M. Aron:]

This is Adam. Could you repeat the question?

[Eric Handler:]

There are two questions in 15 parts.

[Adam M. Aron:]

On pricing. You are zeroing in on, certainly, the performance in the box office where, in total, we were 15.3% up and the industry box office up 12.7%. So, in total, we outperformed, certainly, the acquisition of Starplex was a piece of that. If you pro forma for Starplex - take it out, if you take out Starplex in the current year, our box office was in line. You focused on average ticket price, and certainly Starplex was a piece of our performance there were - you look at the industry, average ticket price was probably up over 5%, we are up just under 1%. And Starplex is certainly a piece of that. Because of the markets they serve and this discount theater operation that you referenced, average ticket price for that circuit is about $4.80-some cents - $4.80 to $4.90. And, certainly, our average ticket price of our traditional for our core AMC Theatres is well over $9.00. So, once we blend that in for the full quarter, that has a dilutive effect on our average ticket price performance. The second piece you alluded to as well, we've anniversaried the tax-on-top treatment and many of our peers are actually still probably in the middle of deploying that, so the industry results are impacted favorably by our peers taking tax on top. And our results are not as favored, if you think about it, because we don't get that benefit. We had a good IMAX in premium format performance. IMAX was up about 63%, 3D up even a little more than that almost 70% - and our own premium large format was up 20%. The ticket prices in the premium format were kind of flat. I think IMAX was up 2% to 3%. 3D was flat. Total premium format contributions 21% this year versus 50% last year. That certainly would lift our average ticket price, but then once you lay on top the impact of Starplex, it is mitigating it. Your question about what are we going to do with the discount operations in Starplex - they do have discount theaters, the screens film weeks later, so they are not on first run break. They charge lower ticket prices. The thing that is most intriguing to us about that operation is that all of them are profitable, from a cash flow generation perspective. And many times, when you are running a traditional theater and as it ages and matures and, probably, gets into the later years of its life, you need an exit strategy. Sometimes the exit strategy is to reseat them, make them new again, that we are doing effectively. In some cases, though, the market is just not there and you're probably better served to go to another pricing strategy, like a discount operation. And to be able to do that, and do it profitably, is really kind of the magic of that strategy. They do it very well. It is a learning opportunity for us. We would continue to operate those theaters to the end of their lease term. Certainly, maybe even think about extending that as long as they are generating positive cash flows, but it is a learning opportunity for us, and we will run them as long as that remains the case. I think I addressed 80% of your questions I hope, if not all of them.

[Eric Handler:]

That is good enough for government work. I appreciate it.

[Operator:]

Thank you. Our next question is from the line of Jim Goss, Barrington Research. Please go ahead with your question.

[James Goss:]

Thank you. I will try to ask slightly fewer. But, Adam, you were talking quite a bit about the PLF options and, if you look at IMAX versus Dolby cinema at AMC Prime in particular, aside from the content flexibility aspect, what is your read on the key differences, one versus the other quality or branding, or whatever else you think there is that's meaningful?

[Adam M. Aron:]

Well, you are talking to someone who has more than one child, and I love all my children equally. I think, actually, that is not a bad metaphor for thinking about IMAX, Dolby, and don't forget our own proprietary house brand that's being created. It is not really all that important for us to nuance where IMAX is better developed than Dolby, or where Dolby is better developed than IMAX. The important point is, what we are seeing in our theaters right now is that our guests love IMAX. And our guests love Dolby Cinema. Craig gave you the number

[James Goss:]

Alright. Thank you. The other couple of things, one quick one. RealD, I notice you took a $0.02 gain. Did the terms at all change with them going private and you're not having an ownership stake anymore? And the other one is, I know you're a marketing guy, if you could discuss any further thoughts you have on the segmented reseating experiences that you talked about the last couple of calls. That would be of interest, too.

[Adam M. Aron:]

Alright so, quickly on RealD. No, there is no change to our economics in RealD. But I just gave an enthusiastic endorsement to both IMAX and Dolby Cinema. Let me also say that AMC has been a leader in 3D, and we are also very impressed with our partnership with RealD-3D. We intend to continue to have a strong commitment to 3D formats and 3D capability within our theaters. We do know that so many of the tent poles that are coming in 2017 and 2018 will offer 3D options, and AMC will be perfectly positioned as a result of our 3D capability. In terms of segmented renovations and theater receipts, it has been AMC's policy historically, it's either touching an entire theater or not touch it at all. That has been a very successful strategy. But as we look ahead, especially as we look at the Carmike circuit, it is not clear to us that making investments in every single auditorium will generate the kind of returns that we have historically produced, if we invest in every single auditorium. Now, when you think that we still at 250 theaters to look at reseating capability within the AMC family, and maybe more than 500 theaters that we can look at across AMC and the Carmike circuit, there is still an enormous opportunity for us to take this renovation strategy forward. And I already mentioned on the call that, not even looking at the Carmike circuit, we ought to be able to fully reseat and fully renovate 105 more of our theaters in the next 1.5-years. You can probably add another 50 Carmike theaters that could be wholly reseated, wholly renovated in the coming years. But, we think there is a really interesting additional opportunity. If it does not make sense to reseat and renovate every seat in the theater, we can reseat some. And that will allow us to introduce either IMAX or Dolby Cinema, or our own house brand PLF in those theaters, making sure that those auditoriums especially are reseated. We are also looking at what might be considered partial auditorium reseat possibilities. One of the places seating auditoriums does not make sense is in the highest-visited theaters of today. And the reason for that is, when we reseat and we take out traditional sit'em-up-straight seats and replace them with reclining seats. By definition there is seat loss in the auditorium. In theaters that are lightly visited, that seat loss is painless, because you are taking out seats that are never filled and replacing with seats that are of greater appeal to consumers and drawing pre-submissives. In the highly visited theaters, you cannot necessarily afford that seat loss. And so, one of the things that is interesting to us is maybe we would only put the reclining seats in a third of an auditorium, or a half of an auditorium. And putting in new, more comfortable seats in the remainder of the auditorium, but not necessarily seats that had the kind of seat loss that a reclining seat requires. So that is also on our radar screen. We are already testing this new strategy in some of our theaters. In the third quarter, we are going to deploy this test of other kinds of seat options, other kinds of partial-theater renovations, partial-auditorium renovations. And the beautiful thing about a company like AMC is, today, we have about 387 laboratories in which we can experiment with innovation, where we only have to deploy the capital to address our theater and our auditorium, and see how customers respond. And if customers respond poorly, we back off, as we did in the texting, 36-hour flap. If consumers respond positively, then we aggressively roll out nationally, as we are going to do with AMC Stubs where, in the theatrical testing that is going on right now, the returns are very encouraging.

[James Goss:]

Thanks very much.

[Operator:]

Thank you. [Operator Instructions] Our next question is coming from the line of Barton Crockett, FBR. Please go ahead with your question.

[Barton Crockett:]

Great. Thanks for taking the question. One thing I wanted to zero in on is in the prepared CFO comment. You mentioned something about the lower contribution from strategic initiatives tied to the effects of competitive new builds and recliner remodels. Could you give us a little bit more detail there, what is now the growth on your recliner theaters on a comparable basis? And what's happening there that you are calling out?

[Craig R. Ramsey:]

We will give it a try. Adam alluded to it in his remarks, and if you think it's about what we have talked about in the past, we probably quoted statistics well in excess of industry performance - admissions revenue of our recliner reseat, I think were in Adam's comments up 16% year-over-year. So that's still on admissions revenue per screen basis, still very strong, but it is not likely the first five that we launched. And fully expected that, as the concept gets deployed throughout the market as other exhibitors copy the strategy and the market matures from a recliner perspective, you are going to see that kind of erosion. So I don't know - I don't want to get into any more detail from initially, when we were reporting 50% growth, 60% growth in attendance to today, where we are seeing still well in excess of market performance, 16% up on admissions per screen basis, that's the order of magnitude of decline and it's largely competitive.

[Adam M. Aron:]

Its Adam chiming in. As nice as it would be to get 50% growth all the time, we will still happily take 15% growth. That's still a great stimulation and produces great financial returns.

[Barton Crockett:]

Okay. All right. So, the delta relative to the industry, up 12% or so, is about three percentage points, three or four percentage points, I guess. So that is enough of a delta to think that you get a positive ROIC and continue with the big reseat push?

[Craig R. Ramsey:]

Well, yes, absolutely. The leverage in the business, you get that kind of over-industry performance or over-industry indexing, the leverage in the model still generates substantial gross in EBITDA for the circuit - or for that group of theaters above 50%. You are definitely going to drive above-threshold returns above our 25% threshold returns.

[Adam M. Aron:]

Remember what all this led to EBITDA 50% for the circuit, year-over-year, adjusted for the one-time gains out. The initiatives that we have been embarked upon are still producing fabulous financial returns. I understand we can dissect exactly how much and differing rates, but if you take one step up and go to the forest from the trees, financially, these projects are still immensely profitable for AMC..

[Barton Crockett:]

Okay. Now I wanted to ask a question on a separate topic. Adam, you put out your goal to double, basically, the membership in your free and paid programs there at AMC. You have been through this before at other industries. What does a doubling of membership do to the P&L of the business? What have you seen in the past? And how could the reaction at AMC be similar or different to what you have seen in the past when you have grown membership?

[Adam M. Aron:]

So we've got some data that the incrementality of our current AMC Stubs program is around 25%. Meaning that, of the 21% of total tickets bought at AMC last year by AMC Stubs members, which we sold 200 million tickets, so that is 42 million tickets, that there was about a 25% incremental surge in loyalty to AMC from those human beings because of AMC Stubs. So 25% off is 20% of the total, so that says about 8 million of those 42 million tickets would not have been purchased at AMC theaters, if we did not have the Stubs program. In looking at redesigning Stubs and taking this from 20% participation to 40% participation, that is another 40 million tickets or more on which loyalty is tracking. And if we can see the same kind of incrementality in those people as we see in the current AMC Stubs members - I am just giving you the quantification here that is another 8 million incremental tickets that will generate at AMC, which is a 4% lift in attendance for AMC. Now, we're only rolling out this program in the third quarter of 2016, and we are not getting double participation in the first week. We did say it is going to take 24 months. But if we can find initiatives that can sell an extra 8 million tickets a year at AMC, we will gladly take them, as long as the cost of those initiatives is far less than the incremental revenues. And if I sort of more broadly that's a very specific and quantitative approach for AMC. if I take the broader part of the question that you asked, loyalty programs were really launched in the United States, in a big way, in the early 1980s. And, as you know, I had something to do that, creating one of the very first airline frequent-flyer programs and one of the very first hotel frequent-guest programs. It is 30-years later, and every company in America, just about, has a loyalty programs. That would probably tell you that the experience in industry, after industry, after industry, over the past three decades, is that loyalty marketing and database marketing works. And that companies are very wise to focus on their best customers, and they will be rewarded with increased patronage as a result. Now, these things don't operate in a vacuum either. Some of our competitors also have loyalty programs. Some of our competitors do not. So, on the offensive, to the extent that we have a stronger loyalty program, we will increase loyalty and increase business. Similarly, if we don't have a strong loyalty program, that would leave the door open for competitors to take share away from us. So, we are extraordinarily confident that the experience of AMC Stubs will work, and it has one last corollary benefit which is ever-so important

[Barton Crockett:]

That is very helpful. Thank you for that color.

[Operator:]

Thank you. Our next question is from the line of David Miller, Topeka Capital. Please proceed with your question.

[David Miller:]

Hey, guys. Congratulations on the stellar results. Craig, just be clear, on an apples-to-apples basis, excluding Starplex, average revenue per screen you said was in line with the general market? Or did you slightly beat the general market year-over-year? Thanks. All right. And then I have a follow-up. Thanks.

[Craig R. Ramsey:]

David, the in-line performance was on attendance per screen, after carving out Starplex. And we think that is probably what we're focused on attendance driving attendance and so that feeds the food business and, as you see, that was up 21%, almost 22% year-over-year and contributed to the overall 50% EBITDA Adam was talking about.

[Adam M. Aron:]

We also want to be careful here because Starplex is 8% percent of our theaters, 6% of our screens. Craig already mentioned on the call, the average ticket price in the Starplex circuit is half of the ticket price in the pre-Starplex circuit. So, it is obviously a much lower percentage of our revenues than even the 6% of screens. And we don't want to get into the precedent of reporting on Starplex numbers and AMC numbers because, at the end of the day, the Starplex numbers are a de minimus part of the AMC overall. And we don't want to get you distracted in that, How did Starplex do? Because in the grand scheme of things, it is not really all that important.

[David Miller:]

Well, actually, I was not asking that, I was actually asking how you did ex-Starplex. Because, just according to my models here, you came in below where we thought you'd come in. And I am trying to figure out, was it a shortfall in premium format? Was it a shortfall in attendance? The market was up 12.3%. It looks like you guys missed that, ex-Starplex. That is the explanation I'm looking for.

[Craig R. Ramsey:]

Yes I know that it's the gap between - we talked about attendance, which was, in our view, dead on. Take out Starplex because it operates at a lower attendance per screen. If you look at the historic AMC circuit, attendance per screen, period over period, in line with the industry. The difference between then as you switch to admissions revenue, that is where the tax on top differential really takes hold We are not benefiting from tax on top. We did that last year. The industry as a whole saw a lot higher average ticket price development, in good part due to that strategy.

[Adam M. Aron:]

It's just on that last point. I just want to make sure we are not sounding defensive about either our pricing or tax on top. The tax on top was a smart initiative that AMC launched. The rest of the industry took a year to watch and see. They copied what AMC did. We have already anniversaried of our comp, so they are catching up. We don't think you will see this pricing differential once they anniversary their tax-on-top initiative.

[David Miller:]

Okay. Great. Just one follow-up if I may, Adam. If you overlay a map of the Carmike assets with a map of your assets, it looks like you guys are fairly heavy and just hugely dominant in Florida, Georgia, Illinois, and Texas. A big states, obviously. What is your inclination to fighting the DOJ here if the DOJ comes back at you and says, hey, guys you have got to sell off a big chunk of these assets? Thanks.

[Adam M. Aron:]

Thanks for asking. Number one, as the CEO of a company who has acquired assets before, I don't believe the word dominating has ever been used by me, or the word dominating has ever come out of my mouth. So, for anyone who is listing to the call, let's make sure that was not the Company using the word. I'm joking. Next, I would even consider this fighting - this exercise, this regulatory review, as fighting the Justice Department. We just went through a very successful antitrust review with the Starplex circuit just a few months ago. Our dialogue with the Justice Department was highly professional on both sides, I might add and we did divest a couple of theaters out of the Starplex acquisition. In going into the Carmike transaction, we wholly expected that we will come out of the Carmike transaction divesting some number of theaters where the local competition across the street, down the block, is too close for comfort. And we are working with the Justice Department, and expect to work with the Justice Department throughout 2016, to get to a position where they and we are comfortable with the surviving AMC circuit.

[David Miller:]

Okay. Thank you.

[Operator:]

Our next question is from the line of Anthony Nemoto, Credit Suisse. Please go ahead with your question.

[Anthony Nemoto:]

Great. Good morning. Just a question on, I saw, in the CFO commentary, the CapEx guidance was slightly increased. I just wanted some color there. Assume it is around an accelerated timeframe on some of the recliner or other pre-initiatives, but yes, just a confirmation would be great there. And then, also - I don't know how much you can disclose, but anything around discussions with Screening Room and the Company's thoughts towards theatrical windows and ventures, like Screening Room, would be great. Thank you.

[Adam M. Aron:]

I will take the industry one as Craig looks for the other. On windows, obviously windows are important, and AMC believes in windows, and AMC is willing to talk with our studio partners about being creative around the edges of windows, but as was the case last year with the Paramount experiment, but, fundamentally, we believe in windows. Having said that, it has been widely reported in the press that the one circuit that has been intrigued by Screening Room is AMC. We've made no public comment about Screening Room and don't think it is probably wise to make public comment about Screening Room today. It is still just an idea. Until such time as they've got studios signed on and product to offer, it is just an idea. So, we will save our Screening Room commentary for private conversations between us and Screening Room, between us and our studio partners, rather than fighting it out with the press whether Screening Room is a good idea, going forward.

[Craig R. Ramsey:]

On the CapEx guidance, I think where we indicated last time around into the calendar year was about a gross number of $390 million to $410 million, and we are up about $10 million on that. The net I think was around $270 million at that point in time; now we are in the $280 million to $290 million, so we are up about $10 million. We are finding a few more projects. We don't think that a change of that magnitude really materially affects our free cash flow development. So it is probably finding a few more receipt projects that we can launch into and get them done, and start contributing to financial results, that is driving the difference.

[Adam M. Aron:]

And the new website and new mobile approximately, because those new initiatives are $11 million just between that pair. But, again, when you see the new website and put it side by side with the old website, it is going to sell so much harder. And we have almost 150 million visits to our website annually today. When you think we have 150 million unique hits coming to our website, and if our website is far more potent and far more effective in selling movie tickets, that should translate to, again, increases in visitation and attendance at our theaters, which is the lifeblood of our revenue growth.

[Anthony Nemoto:]

Great, thanks.

[Operator:]

Thank you. We have time for one more question. The question is coming from the line of Leo Kulp, RBC Capital Markets. Please go ahead with your question.

[Leo Kulp:]

Good morning. Thanks taking the question. Just a few ones around the recent Fox announcement that it was no longer going to honor clearance requests. First, do you see other studios following suit on that? Second, how do you expect this will impact near- and long-term industry screen trends? And then, finally, do you see this having any impact on your screen policies and competitive [notes] (Ph)?

[Adam M. Aron:]

I am going to duck the question as to what's the industry impact of a change in clearances because I am not smart enough to know. But let me talk about AMC. We only clear in less than 30 of our 385 theaters today. And we've got lots of people who clear against us. So, our view is really pretty simple. AMC has done very well in an industry that clears. AMC will do very well in an industry that does not clear, realizing that we only have 26 theatres that clear a day and that we have more theaters that clear against us than we clear against them. This might actually be a positive for AMC because we may have more access to films rather than less access to films. So we were fine with Fox's announcement and if others - I assume some other studios will match. They are probably watching and waiting to figure out what the industry impact is, as you describe it. We are indifferent to whether they keep clearances or not. I would further add that AMC, who thinks of itself as a highly able competitor, likes being in a competitive industry. And anything that makes this industry restrictive or anti-competitive is something that AMC would like to avoid. AMC would like to be a highly competitive player in a highly competitive industry for all the reasons we talked about on this call, all of our initiatives, all of our desire to be an innovator and forward thinker. We are happy to face competition. I generally believe that competition keeps companies on its toes, and you get far more complacent in a noncompetitive environment and you get far more innovative in a competitive environment. And when you are innovative is when you will find those things that actually do drive great financial return for shareholders.

[Leo Kulp:]

Got you. Thank you very much.

[Adam M. Aron:]

So I think we say thank you all. John, do you want to wrap up the call?

[John Merriwether:]

I just want to say thank you to everybody. We look forward to talking to you between now and when we announce Q2.

[Adam M. Aron:]

It is Adam. If I forgot to mention earlier in the call, our adjusted EBITDA, excluding one-time gains, was up 50.1% year-over-year. Goodbye, everybody.

[Operator:]

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