IMAX Corporation
Q4 2016 Earnings Call Transcript

Published: 24 Feb 2017

[Operator:]

Good day and welcome to the IMAX Fourth Quarter 2016 Conference Call. All participants are currently in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. As a reminder, today's conference is being recorded. And at this time, I would like to turn the conference over to Ms. Jessica Kourakos, Senior Vice President of Global Investor Relations. Please go ahead, ma'am.

[Jessica Kourakos:]

Thank you. Good afternoon and thanks for joining us on today's fourth quarter and full year 2016 earnings conference call. Joining me today in our Los Angeles office is our CEO, Rich Gelfond; our CFO, Patrick McClymont; and our Head of Entertainment, Greg Foster, who will each have prepared remarks and will be available for Q&A. Also joining us is Rob Lister, Chief Legal Officer and Head of Business Development. Today's conference call is being webcast in its entirety on our website. A replay of the webcast will be made available shortly after the call. In addition, the full text of our fourth quarter and full year release and the slide presentation accompanying today's call have been posted on the Investor Relations section of our website. We also provide quarter-to-date box office results on the IMAX Investor Relations website every Friday with a one week lag. We also have an Investor Relations Twitter account using the handle @IMAX_Investors that includes this box office disclosure as well as other items that maybe of interest to the investor community. Finally, I would like to remind you of the following information regarding forward-looking statements. Our comments and answers to your questions on this call as well as the accompanying slide deck may include statements that are forward-looking and that they pertain to future results or outcomes. Actual future results or occurrences may differ materially from these forward-looking statements. Please refer to our SEC filings for a more detailed discussion of some of the factors that could affect our future results and outcomes. During today's call, references may be made to certain non-GAAP financial measures as defined by Regulation G of the Securities and Exchange Commission. Discussion of management's use of these measures and the definition of these measures, as well as reconciliations to adjusted net income, adjusted EPS and adjusted EBITDA as defined by our credit facility, are contained in this afternoon's press release. With that, let me now turn the call over to Rich Gelfond.

[Richard L. Gelfond:]

Thanks, Jess, and thank you all for joining us today. 2016 was an impressive year on several fronts. I'd like to start out by highlighting some of our key accomplishments before getting into more detail on signings, installations, box office and ultimately new initiatives. Looking first at the core business. In 2016, we signed agreements for a record 319 new theatres across 28 countries, which highlight strengthening demand for IMAX theatres around the world. As a result of heightened signings activity, we significantly increased our installation pace throughout the year, adding 166 new theatres to the network and bringing our global network to more than 1,200 installed screens with an additional 498 in backlog. As we look to 2017 and beyond, we believe our robust theater network is very well positioned to take advantage of the promising slates ahead for us. And with exciting multi-picture deals, such as the one we announced yesterday with Disney, which encapsulates films across Lucasfilm, Pixar and Marvel. We should have a long diverse pipeline of exciting films for years to come. Greg will go into specifics, but the Disney deal includes a large number of big titles such as Star Wars

[Greg Foster:]

Thanks, Rich. We certainly feel like we have a lot to look forward in the year ahead. But before going forward, let me take a quick look back at 2016. Well, last year got off to a great start with the sustaining power of Star Wars

[Richard L. Gelfond:]

Thanks, Greg. As I often say, signings lead to installs and installs lead to revenues and are typically the best indicators for the health of our core business. With that in mind, we believe our future looks very bright. As many of you know, box office is cyclical. However, we're optimistic that the promising 2017 film slate will bring us back into an up-cycle. And with a much larger network today than we had at this time last year comprised of a higher mix of revenue sharing theatres, we believe we have the foundation in place for a promising year. Moving on to some of our new initiatives, we made significant progress on two fronts

[Patrick S. McClymont:]

Thank you, Rich, and good afternoon, everyone. As Rich discussed in his opening remarks, our core business continues to benefit from strong global demand for IMAX theatres. During the year, we installed a total of 166 new theatres, exceeding the midpoint of our original 2016 guidance by approximately 40%. If you turn to slide 4 of our earnings presentation, you'll see the breakdown of our 166 new installs in 2016 by type. Additionally, we upgraded 16 existing theatres during the year, primarily for our laser GT systems. I'd also like to point out that across our 1,100 screen commercial theatre network, almost 60% of the screens are joint revenue sharing arrangements, which allows us to increasingly participate in recurring box office economics. From a geographical standpoint, China led the charge this year with 116 new IMAX system installations. We also installed 43 new theatres in other international markets in line with 2015. Regions producing notable signings and installations momentum include Continental Europe, Japan and India. Going forward, we believe that the consolidation in the industry should increasingly play to our favor, given that our biggest global partners are the key consolidators in this space. For example, Wanda Cinema acquired Hoyts in Australia and AMC acquired Carmike in the U.S., ODEON & UCI in Continental Europe and most recently Nordic Cinema in Scandinavia, which includes some of the highest performing theatres in Western Europe. We look forward to working with these partners and others in our efforts to bring new IMAX theatres to more of the growing footprint around the world. Now moving to our financial results, I'd like to begin by reiterating the importance of looking at our business on both a core and a new initiatives basis, a framework we discussed during the Q3 call. As a remainder, our core business consists of our network business, which includes all box office sharing revenue from exhibitors and studio partners, theatre sales and maintenance, as well as other businesses like distribution and post production. New initiatives primarily consist of performance from our original content strategy, virtual reality startup, TCL Home and IMAX Shift businesses. As many of these new initiatives are still in the seeding phase, it is important to provide investors with visibility into the fundamental economics of our core business, which drive the economics of our consolidated results. Using this framework, let's start off by reviewing some of the key results and highlights within our core business for the fourth quarter and full year of 2016. Our core business JV and DMR revenues came in at $24.5 million and $27.6 million for the fourth quarter and generated margins of 61.8% and 60.8% respectively. For the full year JV and DMR revenues were $91.4 million and $106.4 million and generated margins of 65.4% and 65% respectively. Results reflected weaker box office, higher DMR cost, increased depreciation as we grow the network and FX headwinds. To quantify the FX closure, in 2016, our international box office was down roughly $26 million or 4% as a result of currency devaluation primarily from the Chinese RMB, British pound and euro. Much of the box office decline last year came from China, which faced several headwinds as Rick's laid out earlier. Our strong installations performance of JV theatres yielded higher upfront marketing and launch costs, which are generally in the neighborhood of $50,000 to $60,000 per theatre. We incur this expense on installation regardless of whether a theatre is installed at the beginning or the end of the year. And given our installations tend to be back-end weighted, we are recognizing upfront marketing and launch costs without the benefit of the theatre having time to generate meaningful box office revenue. To quantify this issue, we incurred $4 million of these launch costs in 2016 or $0.04 on a per share basis. As these JVs move into subsequent year of operation, they will cruise (28

[Operator:]

We'll take our first question from Stan Meyers with Piper Jaffray.

[Stan X. Meyers:]

Thank you. Rich, I wanted to congratulate you on your new three-year deal with Disney earlier this week. No doubt a great partner to have. I guess, two areas I wanted to focus a bit more and get some clarity. First on the camera use. I was wondering if Disney increased its commitment to use IMAX cameras in future films relative to what you guys have disclosed previously? And second in the press release, I believe you mentioned that under the new agreement both companies will work together to create more marketing materials, does this sort of imply increased marketing dollar commitment from IMAX, and potential pressure on the DMR margins going forward. Just wanted to see if you have any more details around that? Thanks.

[Greg Foster:]

So, Stan, this is Greg, and I'll take that. So first of all on the camera side, it's definitely become a more strategic initiative for us, but with that said, we're very careful not to announce anything until we actually know how the movie is being edited. So you'll notice that Star Wars

[Stan X. Meyers:]

Thanks.

[Operator:]

And, we'll take our next question from Eric Handler with MKM Partners.

[Eric O. Handler:]

Thank you very much for the question, actually two questions. First, Patrick, I appreciate the help instead of laying out some of the expenses in 2017 from the new initiatives, wondered if you could sort of give us some detail in, how we might think of revenues or at least if not revenues, EBITDA line. Is it a breakeven year, is it a headwind of $20 million, $10 million just so we can sort grasp what would be considered a range that you would consider successful or disappointing or break it out some way that we could sort of figure out how to track this?

[Patrick S. McClymont:]

Sure. It's a good question. That was what we're trying to accomplish on the call. So, I'll try to clarify. The $16 million to $18 million we talked about as an operating expense investment, that's best described as the net number, right.

[Eric O. Handler:]

That's it. Okay, okay.

[Patrick S. McClymont:]

We expect there to be some modest revenues, but we're still very much in investment phase in these initiatives, and so when you look at it on a – instead of a net number, it's that $16 million to $18 million is what we're currently estimating.

[Eric O. Handler:]

Okay. Great. I appreciate the clarification. I am a little slow sometimes. Secondly, for Rich, a couple of months ago you guys put out a press release saying that you have reseated the AMC theater on Broadway and 68th or AMC reseated it for the IMAX screen. I happened to notice that there was also very nice recliner or rocker reseating done in your New Rochelle, IMAX screen as well, how many screens have actually been reseated with these nice leather recliners – very comfortable by the way – and how many of your facilities do you expect to reseat over the next year or two? And has there been any positive impact from those reseats?

[Richard L. Gelfond:]

So, Eric, as you correctly stated, it's the exhibitor that does the reseating and not us. I think we have about 25 reseated so far. Again we don't have a layout, a plan from each of the exhibitors, but I would just guess that at least that number probably would be done again this year. So, there's different kinds of reseating, there is recliners or there's rockers you enjoyed in Lincoln Square, New Rochelle. The data, it's early, but the data on the rockers is pretty positive, it looks like there's been an uptick. The data on the recliners, is a little more controversial because as you know we did so well on the opening weekends that the seating capacity which you lose by going to recliners, they will offset your ability to capture that amount of people. So, I think, based on the data today it's quite encouraging. I think it's an opportunity for higher box office and, I think, hopefully we and the exhibitors will go in the direction of the rockers which, I think, maximizes the returns.

[Eric O. Handler:]

Thank you. Appreciate it.

[Operator:]

And we'll take our next question from Steven Frankel with Dougherty.

[Steven Frankel:]

Good afternoon. Greg, maybe I'll start with you. Could you give us some color on the upcoming U.S.-China trade negotiations and what the likely impact might be on the industry and IMAX in particular?

[Richard L. Gelfond:]

So I'll give you that, at the moment, because I've spent a fair amount of time on it. The answer is I feel fairly strongly that the impact on the U.S. side, which includes us, will be positive. Remember, the WTO ruling was a number of years ago and the last go-around was a five-year term and this one is set to negotiate that term to get in compliance with the original WTO ruling. So my own opinion is the question is how much better does it get for the studios and does it get for IMAX? Unfortunate I don't the answer to that, but directionally, I think it's highly unlikely it will get worse and much more likely it'll get better.

[Steven Frankel:]

And do you think this is something that will come into play by the end of the year or we should think about the changes impacting 2018 rather than 2017?

[Richard L. Gelfond:]

That one's harder to predict because I know the negotiations haven't started yet. They are scheduled to start in February, but obviously, that's not going to happen. So I just don't know.

[Steven Frankel:]

Okay. Let me shift to Inhumans. A lot of TV productions these days play internationally on the same timetable they do in the U.S. You seem to imply that a channel like Disney was going to do Inhumans U.S.-only in Season 1 and the syndication happens in Season 2 or did I just mishear you?

[Richard L. Gelfond:]

No, it's going to be syndicated before the opening of the IMAX release. It's just they're not going out and start syndicating it for a while now. But it's going to run internationally when it runs in the U.S.

[Steven Frankel:]

Okay. And will it play in China at least on the film side?

[Richard L. Gelfond:]

It's interesting. We hope so. We're working hard to make that happen. But in China, there are very complex regulations about getting movies in and getting TV shows in and getting video content in, and we're in the middle of navigating it. So we're hopeful, but we can't predict.

[Steven Frankel:]

Okay. Let me sneak one more in. You talked a lot about getting more IMAX DNA in the films. And it does impact your market share, but it also seems to me like the average person still doesn't get it. How do you take advantage of what is a great experience and make sure that the incremental person who isn't a fanboy knows what's going on and goes to you rather than a PLF?

[Greg Foster:]

Well, this is Greg. I think it's harder to do when you have fewer titles per year. So one of the strategic reasons why we've doubled the amount of films with specific IMAX DNA is to capitalize on exactly what you just said. We have to condition and keep repeating the process and make sure that movie goers know about it. And doing so with a concerted strategic plan with our partners on the studio side and our partners on exhibition is exactly what we're going to do. I think we've already started to do that. You've seen, Steve, that on movies like The Force Awakens and some of the Marvel movies, obviously Chris Nolan's movies and the Transformers movies, what happens to our indexing. And we see those results as well as the studios and exhibitors, and we're going to just keep pounding that and make sure that people know that when they come to an IMAX theater, they're getting an experience that they can't get anywhere else.

[Steven Frankel:]

Okay, great. Thank you.

[Operator:]

As a reminder, please limit yourself to one question. We'll take our next question from Jim Goss with Barrington Research.

[James Charles Goss:]

Thanks. I was wondering related to some of the programming. You've gone back and forth with regard to kids programming and I'm wondering what are the considerations that are going into such a decision for either Greg or Rich? And with the blockbusters, are the studios onboard with letting you let your winners run and make that decision, more of a game-time decision? And that's it.

[Richard L. Gelfond:]

On the family-oriented movies, Jim, the sort of ask/bid on the whole thing is how are we going to do, right. There is no point in doing it just for the sake of doing it. What we've noticed is that when a movie does $200 million or $300 million at the box-office and while we probably will do a smaller percentage of that box-office, I'd rather have 7% of $300 million than 15% of $50 million, and that's really the question mark. Obviously, we also want to be able to give an incremental advantage to the experience. If it's something that we – whether it's through sound, whether it's through marketing, whether it's through the picture, we can provide something that's additive, then we have to consider that. But we think, for instance, with the movie like Beauty and the Beast, which has an expanded aspect ratio in IMAX and is a true blockbuster, that's a great title to be a part of. The other question in terms of what happens with the length of play. We make commitments and we stick by our commitments. And as you know, we have only one screen in 99% of the complexes that IMAX exists. With that said, if there is a movie that just doesn't perform in anyway whatsoever, in the spirit of partnership, we will go and talk to our exhibitor and our studio partners and usually the right things happen. But with that said, we do make commitments. We take those commitments very, very seriously and we'll never turn our back on our commitment.

[James Charles Goss:]

Thanks.

[Operator:]

And we'll take our next question from Eric Wold with B. Riley.

[Eric Wold:]

Thanks. And maybe I'll call this a 1.5 question. I guess one real quick housekeeping and accounting. How many titles hit the DMR cost during the quarter for this quarter and then for the year ago? Then I have my main question after that.

[Patrick S. McClymont:]

The year was 51 titles I believe.

[Greg Foster:]

52 titles.

[Patrick S. McClymont:]

In the quarter?

[Richard L. Gelfond:]

I think he means for the quarter versus last year's quarter.

[Patrick S. McClymont:]

That we'll have to come back on that. (52

[Eric Wold:]

Okay. So I guess the question is, if we think about the VR Centres, I know it's relatively early. You talked about the $400,000 cost to get these open. As you kind of think longer term and assuming these five centres or whatever the number they'd be end up doing well and you decided to move forward beyond that, how should we think about that business model eventually morphing? Is this something that would be more like a core JV where if it's in a movie theater, that movie theater operator would contribute to the upfront cost? If there is a separate side door out to the shopping center, would the developer contribute to the cost? So is that kind of something you're thinking about kind of longer-term where someone would run with it either in that way or could it be even larger where someone may kind of take it as a franchising model? Someone would, so to speak, kind of eat all the costings (53

[Richard L. Gelfond:]

We're hoping long-term, Eric, but judging by the first results, which again are very good but early, I think this is a business at the moment we plan on participating on in JV kind of way. I don't think if someone came to us today and said, I'd like to buy X territory, and by the way people have in different forms, we've said no. I think this is a enormous opportunity for us. But as it unfolds and we look at the amount of capital that's required and the IRRs and we'll be open to anything.

[Eric Wold:]

Fair enough. Thanks, Rich.

[Richard L. Gelfond:]

Okay. Thanks.

[Patrick S. McClymont:]

Eric, I found the answer to your question. So for the quarter, we released nine films in 2016 versus seven in 2015, and for the year, it was 51 films in 2016 versus 44 in 2015.

[Operator:]

And we'll take our next question from Alexia Quadrani with JPMorgan.

[Julia Yue:]

Hi. Thank you. This is Julia Yue on for Alexia. As you mentioned, IMAX has had such a strong installations momentum over the past couple years, at this point, how much visibility do you have into the 150 installation to 155 installation guidance that you gave for the year? And could this end up increasing a bit given how much the 2016 installation target moved up from the beginning to the end of the year?

[Richard L. Gelfond:]

The answer is yes, Alexia (sic) [Julia] (54

[Operator:]

And we'll take our next question from Matthew Brooks with Macquarie. Matthew Brooks - Macquarie Capital (USA), Inc. Good afternoon, guys. Can you just make a comment were the 7,000 people who attended paying customers, because you could already be annualizing $0.5 million in sales in winter (55

[Richard L. Gelfond:]

Yeah, more or less, they're paying customers. I mean, there were some promotions that came in, so I don't want to mislead you, but more or less, they're paying customers. In terms of revenues for this year, it's still early to try and predict that because it depends how many centres we open, what parts of the world they are, can't do that. But as I said a couple times, it's extremely encouraging. I don't know how many of you got to see the press coming out of our press conference here in Los Angeles, but it's been really well received. We've taken about 100 exhibitors, real estate people, talent through the thing and the reaction's been very, very positive. Matthew Brooks - Macquarie Capital (USA), Inc. Thank you.

[Operator:]

And we'll take our next question from Ben Mogil with Stifel.

[Benjamin Mogil:]

Hi, good afternoon. Thanks for taking my question. So just one on sort of the Inhumans deal as it relates to China, does this end up being part of the existing film quotas? Does this get a carve-out because it's TV product and cannot play in the theaters there?

[Richard L. Gelfond:]

Yeah. Those are all good questions, Ben, which I'm not sure. I mean as you know, we have quite a sophisticated management team in China that's been working to answer those questions. And in fact, Greg went over to Beijing for a few days to help them out. We've had meetings with the relevant government authorities and private enterprise, and we're still sorting that out.

[Benjamin Mogil:]

Okay. Fair enough. Fair enough. On the VR front, I know it's very early in terms of revenue models, but do you envision the revenue model to be more of a licensing model or more of a transactional one when you've sort of all said and done?

[Richard L. Gelfond:]

I'd like it to be transactional, but I think there is a huge opportunity there. But we'll see. It depends how big and how fast the rollout is. So people wanted to roll out a very large territory in very short order. For a lot of money I suppose we'd consider it. But at the moment, we're thinking of it more as a kind of along the lines of our joint ventures.

[Benjamin Mogil:]

Okay. And then lastly, one, for Patrick. The $4 million launch cost for sort of first year JRSA as you mentioned for 2016. What was that number in 2015?

[Patrick S. McClymont:]

I'll have to come back to you on that. I don't have it in front of me.

[Richard L. Gelfond:]

(58

[Benjamin Mogil:]

Or maybe alternatively, like, is it a similar number for 2017 so that this is really just kind of a wash from a net annual basis?

[Patrick S. McClymont:]

Say that again, Ben, I apologize.

[Benjamin Mogil:]

So is the number you look at, early days obviously, but for 2017 kind of a similar launch cost number so that in reality the year-over-year change is kind of negligible?

[Patrick S. McClymont:]

We've talked about what we think we'll do in terms of installs this year. Any of those that are JV deals, we're going to have this $50,000 to $60,000. So that tells you what we expect it to be for this year, but it could bounce around depending on the timing of those installs. Because of the ramp-up in 2016, it was obviously a bigger impact in 2016 versus 2015.

[Benjamin Mogil:]

Got it. That's great. Thank you very much.

[Richard L. Gelfond:]

All right, we'll...

[Operator:]

That concludes today's question-and-answer session. At this time, I'll turn the conference back over to our speakers for any additional or closing remarks.

[Richard L. Gelfond:]

Yeah. So thank you very much for joining us on the call today. I mean, like you, we know 2016 was not the greatest box-office year we've ever had. On the other hand, it may have been one of the greatest strategic years we ever had. And we had our board meeting today, and what I said to my board was, given the alternative having a great box-office year or a great strategic year, I'll take the strategic year all the time. Because we've set the stage with the growth in the theater network and the growth in the backlog and the growth of the installs to hat really produce long-term, meaningful revenue growth. Box-office is a wonderful thing and it has ancillary benefits, such as getting more people in the IMAX business, but in the long-term box-office was in a range and it's noise. In 2016, it was not such good noise. In 2015 it was wonderful noise. But one thing that's not noise is how we grow our network and how we expand our business. And you add to that the new businesses and the encouraging start we've gotten off to, I think we're in a pretty good place and all-in-all I think 2016 was mostly a satisfying year. Thank you.

[Operator:]

This concludes today's call. Thank you for your participation. You may now disconnect.