Michael Mougias - IMAX Corp. Richard L. Gelfond - IMAX Corp. Greg Foster - IMAX Corp. Patrick S. McClymont - IMAX Corp..

Eric O. Handler - MKM Partners LLC Eric Wold - B. Riley FBR, Inc. Vasily Karasyov - Cannonball Research LLC James Charles Goss - Barrington Research Associates, Inc. Mike Hickey - The Benchmark Company, LLC.

Good day and welcome to the IMAX's Second Quarter 2018 Earnings 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 Mr.

Michael Mougias, Vice President, Investor Relations Please go ahead sir..

Thank you, Angel. Good afternoon and thank you for joining us on today's second quarter 2018 earnings conference call. Joining me today is our CEO, Rich Gelfond; our CFO, Patrick McClymont; and our Head of Entertainment, Greg Foster, who each have prepared remarks and will be available for Q&A. Also joining us is Rob Lister, Chief Legal Officer.

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 earnings press release and the slide presentation accompanying today's call have been posted to the Investor Relations section of our website.

I would like to remind you that 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 filing 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.

The discussion of management's use of these measures and the definition of these measures as well as reconciliations to adjusted net income, adjusted EPS, 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..

The Four Heavenly Kings and Hello Mr. Billionaire will debut in IMAX theaters across China. We believe that providing more programming flexibility to our exhibitors will increase the box office generation of our theaters. Another initiative of the company is to work more closely with the key ticketing platforms in China.

Given the majority of industry tickets are sold through one of the two major platforms, as we work to improve IMAX's positioning on these platforms, we believe we'll be able to sell more IMAX tickets and expand our audience.

Overall, these initiatives, coupled with the enhanced differentiation of IMAX with Laser and our broader brand campaign should facilitate continued growth of the IMAX box office.

Overall, we're very encouraged by our strategic progress and financial performance over the last several quarters and look forward to continuing to grow the IMAX value proposition for all our stakeholders. With that, I'll turn it over to Greg..

Impossible – Fallout, which premiered in a purpose-built IMAX theater in Paris earlier this month and has received fantastic reviews. In October, we'll launch Universal's First Man, which chronicles the life of Neil Armstrong and was partially filmed with IMAX cameras.

In addition to the prominent Hollywood content, we also have an exciting slate of local language titles in the coming months that include films from Hollywood, China, Bollywood and South Korea. It's worth highlighting that many local language films have cross-border appeal.

For example, Dangal, an Indian title released last year, grossed over $260 million in markets outside of India. Secret Superstar, another Bollywood title released last year, grossed $140 million in overseas markets. This August, Along with the Gods 2, a Korean film, will hit IMAX screens.

It's expected to be one of the biggest films in Korea, given the first film was the highest grossing Korean film in years. Importantly, the first film was not only successful in Korea, where we currently have 18 screens, but it was also successful in other international markets such as Hong Kong and Taiwan.

I won't go through everything because we have so many promising films for 2019, but next year is shaping up quite nicely. For instance, The Lion King, which is garnering fantastic buzz, will contain several sequences in IMAX's exclusive aspect ratio.

The next Avengers film, which comes out in the spring of 2019, was also filmed entirely with IMAX cameras. Wonder Woman 2, another highly anticipated film, has several key action sequences that were shot with IMAX cameras.

And when studios and filmmakers bring IMAX into their early production process, it helps distinguish the film and, in particular, the IMAX experience.

Studios and talent also tend to highlight the IMAX DNA at premieres, film junkets, and through IMAX-focused marketing content, particularly digital content, which builds consumer awareness and interest.

As a result, we've consistently demonstrated that more box office is generated when IMAX cameras or our exclusive aspect ratio are part of the film's release. And most importantly, more and more filmmakers are including IMAX DNA into their pillar titles.

In the last 12 months, we've worked with 11 different directors and production teams, a number that we expect will only grow over time. Another opportunity for us is to introduce IMAX DNA into local language titles. For example, last month, Wanda announced plans to film Detective Chinatown 3 with IMAX cameras.

For those that don't know, the prequel was a huge hit during the recent Chinese New Year holiday, generating $542 million of box office over its run.

If we can work more closely with directors of international markets, we believe we can increase our market share and become even more synonymous with local language blockbuster titles, which is similar to what we've achieved on the Hollywood front. We look forward to updating you on this progress in the future.

All in all, there are a lot of exciting things happening in IMAX, and we look forward to the exciting portfolio of global blockbusters ahead. With that, I'll now turn the call over to Patrick..

Thank you, Greg, and good afternoon, everyone. Our financial performance in the second quarter benefited from a compelling slate of global blockbusters, continued network expansion, and our ongoing focus on containing costs.

We believe these factors, coupled with the introduction of IMAX with Laser, the launch of our new brand campaign, and the promising macro trends that Rich mentioned, should continue to improve the box office productivity of our network and facilitate earnings growth in the years ahead.

Beginning with our network growth, which is outlined on slide 3 of our earnings presentation, we signed agreements for 40 new theaters in the second quarter. Broken up by deal type, 9 were for sales type and 31 were full JV. The majority of these were with existing partners.

We're encouraged to see our largest partners and some of the biggest exhibitors in the world continue to grow their IMAX footprint, which we view as the best validator of the differentiation and incrementalities that IMAX affords our exhibitor partners around the world.

In addition to the 40 new theater signings, we also signed agreements for 98 upgrades to IMAX with Laser, which was driven by our launch agreements with AMC and Regal. From an installation standpoint, we installed 30 new theaters in the second quarter, including 9 sales-type leases, 19 full JVs, and 2 hybrid JVs.

Turning to our financial results, which begin on slide 4, our strong box office and installation activity resulted in total revenues of $98 million, an increase of 12% compared to the second quarter last year. Network business revenue of $61 million was up 28% over the same period last year.

Theater business revenue of $31 million was slightly below the second quarter of last year as a result of installing three fewer sales-type theaters in the most recent quarter. Revenue from new business was $3.1 million and included a one-time payment related to our VR camera development from last year.

In addition to our revenue growth, we achieved notable operating leverage in the quarter. Gross profit of $60.4 million was up 23% compared to the $49.4 million we generated last year. Our resulting gross margin in the second quarter was 61%, which was up roughly 500 basis points over last year.

In fact, our total gross margin last quarter was better than the previous 11 quarters, demonstrating the earnings power of our network, particularly during strong box office periods.

Turning to operating expenses, SG&A, excluding stock-based compensation, was $26.4 million, roughly $4 million higher than last year, as a result of normalizing our marketing spend, as we previously indicated on our last call, and additional expenses related to FX also played a role.

R&D of $3.9 million was down roughly $1.8 million compared to last year, reflecting lower spend as we finalized development of our IMAX with Laser technology. Net income on a GAAP basis was $7.6 million or $0.12 per share. This compares to a loss of $1.7 million or $0.03 per share in the second quarter of 2017.

On an adjusted basis, net income was $19 million and EPS was $0.30, or up roughly 100%, respectively. Adjusted EBITDA was $39.5 million, up 35% compared to Q2 2017. Adjusted EBITDA margins were up 560 basis points to 43.5%.

Please note, included in the reconciliation to our adjusted earnings and adjusted EBITDA figures is a one-time charge of $7.5 million related to the inclusion of an arbitration that has been pending since 2006. We do not anticipate any recurring charges related to this matter.

In addition to our strong financial performance and strategic achievements, we also repurchased $33 million of stock at an average price of $22.01 per share in the second quarter, and $46 million at an average price of $21.54 year-to-date.

Furthermore, we entered into a new credit facility last quarter, expanding our borrowing power to $300 million from $200 million, while also reducing our interest rate.

In addition to providing the company with enhanced flexibility as we continue to pursue network expansion and share buybacks, we also use the facility to refinance our existing Playa Vista loan, which will lower our interest expense. Overall, we are pleased by the outcome of the new facility and the additional flexibility it provides the company.

Next, I would like to review our guidance for the third quarter as well as the remainder of the year. Please note, an outline of this guidance will be posted to the IR website at the conclusion of this call. We continue to expect to install roughly 180 systems this year, consisting of 155 new systems and 25 upgrades.

Breaking up the new systems by deal type, we expect 55 FTLs, 75 JVs and 25 hybrids. For the third quarter, we expect to install roughly 40 new theater systems, consisting of 12 FTLs, 20 JVs and 8 hybrids.

With regard to DMR expense, I'm pleased to note that we now expect total DMR expense to fall in the $38 million to $40 million range, which is down from our previous guidance of $40 million to $42 million.

As mentioned on previous calls, further automating and refining our DMR process is a priority of the company and we're pleased with the progress we've made on this front. With regard to new business which primarily consists of our VR and Home initiatives, we now expect a pre-tax loss of $4.5 million to $5.5 million.

This is down from our previous guidance of a loss of $7 million to $8 million. Reduction in new business spend reflects the one-time payment related to our VR camera and the closing of two VR centers.

Regarding our VR and home theater ventures, in order to continue to focus on reducing costs from new business, we expect to reach a decision on these initiatives during the next few months.

Moving on, total operating expenses, which consists of SG&A, excluding stock-based comp plus R&D, is expected to be flat compared to last year, which is unchanged from our guidance on the last call. The balance of our guidance is consistent with what we laid out on our Q1 call in April.

All in all, our financial performance over the past several quarters helps demonstrate the inherent operating leverage that exists in our core business.

Looking ahead, we believe Studios' increasing emphasis on global blockbusters, combined with our growing footprint of theaters and more disciplined approach to costs, will continue to increase the earnings power of our business long term. With that, I'll turn it over to the operator for questions..

Thank you. And our first question comes from the line of Eric Handler of MKM Partners. Please go ahead..

Yes, thank you very much and good afternoon.

Two things, first, Rich, I'm curious with the laser systems that you're installing, is this revenue-enhancing for you guys that you're finding to – can consumers, without seeing a side-by-side comparison, do you think that they can readily see the difference? And then secondly, can you talk a little bit about some of the marketing initiatives that you're going to be moving forward with?.

Sure. So I think consumers will be able to tell a difference, Eric. I have no doubt about that. As a matter of fact, just as an aside, but I think we're going to do demos for some investors and analysts who might like to see it.

There is a piece that was released by an online publication called Digital Trends which you should reference, which really goes on and on about how superior the IMAX laser experience is to anything that this reporter had ever seen in terms of image quality. So that's a more objective view.

Also, I think you have to look at the number of signings so far. I mean, it's incredible that our biggest clients in the United States, in Europe – Wanda has agreed to do a number of laser deals – have already signed on. So I think the proof is in the pudding; clearly, the exhibitors think so.

We've also, on the ones that have been out there so far, we've done some studies in terms of what the exhibitors feel about the operation and people's reactions, and the results are incredibly positive about that. The second thing was about the marketing initiative. I mean, we're very excited about it.

Eric, I think you'll be able to see a lot of it, hopefully, as soon as it goes up tomorrow. It's always hard to describe something artistic; I think you have to experience it, but our clients around the world overwhelmingly ask for significant assets, and there are different pieces to this.

There's in-theater, there's digital, there's ticket booth, there's paid advertising templates – so there's a lot of things, and I don't want you to stick on this number, but it's an order of magnitude and an estimate.

But so far, our clients have told us about their plans and tied them to specific assets which equate to about $14 million in paid advertising on their part. Remember, we haven't even launched it yet, so I think it's going to make a big difference.

As I said during my prepared remarks, I think, one thing when I look at the company's performance under my tenure that we could have done better was more creative, more dynamic marketing and I think we nailed it this time..

Thank you very much..

And we will go ahead with our next question from Eric Wold of B. Riley. Please go ahead..

Thanks. Good afternoon. I guess, two questions on the same topic. I guess, first one maybe for Greg or for Rich; I guess, been a lot of kind of stuff in the press around obviously China and the tariff issues and the back and forth and how this can potentially impact Hollywood films importing in the region.

I guess one, what are your thoughts in terms of what could happen there from what you're hearing in the market? And if we get to kind of a worst case scenario where Hollywood content is impacted in that market, do you think the local language content released is strong enough there and would be received well enough on IMAX to support that for yourselves? And then two, you talked a little bit about what we're trying to do in China in past couple of calls, including this one, which was stabilizing that market.

Where do you think you are in terms of getting to a stabilized PSA in China, kind of, obviously, excluding normal slate fluctuations? I guess, how much of that do you think is slate versus other factors keeping you from getting China on the increase again? Thanks..

On the second one first, Eric, I think, as you said, there are lots of variables not only the slate, but also the seasoning of theaters when new ones are opening, when old ones are opening. I think internally we believe that overall it's been stabilized.

That doesn't mean it can't go down a little, it doesn't mean it can't go up a little, but we think the falls we've seen over the last couple of years have been addressed between, you know, the programming changes that we've done; but we're in the process of doing a lot more.

We're doing the new mark (33:40) global campaign there, we're introducing laser in a lot of those markets; we're working with the ticketing services; and I wouldn't say, we're comfortable with being stabilized, but the question for us is how can we make it better and bring it back towards levels that it was in the past.

And you know, we're working on it. Of course, there are external factors in any market that you can't control completely, but I think, in general, we have a handle on the downside and we're working towards realizing the upside. On the other part of your question about tariffs, I think you have to separate it into two pieces with IMAX.

One is the hardware and the other, the films. On the hardware side, since IMAX is a Canadian corporation, there were no issues with tariffs, so that's not a risk related to IMAX.

But I should add that one of the reasons we went public in China on the Hong Kong Stock Exchange was to mitigate some of those risks at a time when it didn't look like that was necessary.

So, you have to remember we have a public company there, some state-owned enterprises, among others are shareholders there, and we feel in a lot of ways, that protects us from some of the noise. In terms of Hollywood films, I personally think that that's going to be low on the list of things for Chinese to go after.

And at IMAX, we have kind of an interesting take on it. It's been a great development for Hollywood to go into the Chinese market, but it's also been a great development for China to have Hollywood in the market. And if you've noticed the – kind of the theme of the Hollywood movies and the image of China has gotten better and better.

So whereas years ago, the Chinese might have been portrayed as the bad guy in the movie, or movies might have concentrated on some negative aspects of China, as a natural consequence of opening the market, that's turned around.

And I think when you look at China's list of important things, keeping that relationship with Hollywood is going to be much more important than finding another area to put a little tariff on.

So, I think, in this world with the two leaders of those two countries, both being somewhat unpredictable, you never say never, but I think it's somewhat remote..

That's helpful all around. Thanks, Rich..

Your next question comes from Vasily Karasyov from Cannonball Research. Go ahead..

Thank you. Good afternoon. My question is about the box office trends. If you look at the international box, IMAX box office ex-China, it accelerated in Q2, and Chinese IMAX box office actually decelerated.

So, can you talk about what trends are driving such a big divergence? And what do you think – what kind of, at least in terms of puts and takes, in the remainder of the year, we can see in China where you can get closer to the growth of the overall box office, which I think, if my math is right, is 20%-plus this year so far?.

So, this is Greg. Two things. First of all, in the second quarter, I think it's really important to note timing. Because of the World Cup, a lot of titles that opened in June in one territory might have opened in July or August in other territories.

So, I think it's a little bit of an anomaly, and I wouldn't get too focused just on that three-month period because of that unique month in June.

The other part, as it relates to China, which has a little something to do with the question that Eric asked earlier from Rich, we're going to ultimately err on the side of another title, meaning multiple titles versus sort of outsmarting ourselves and deciding that we can only pick one. And that's both for local language and Hollywood.

So, I think that's going to do significant – that's going to cause significant benefits to us because we're going to cast a wider net. And the reason we're able to do that when you look on the cost side is because we've made the DMRing of titles significantly more efficient.

And it makes us more nimble, not only in terms of growth, but also more nimble in terms of reducing our costs.

So, I think that's going to have a very positive effect, not only in China, but also in some of the other territories that we talked about on the local language side, because it's very clear that local language is a huge part of our programming initiative going forward..

So, you think in China, it's not unreasonable to expect an acceleration in IMAX box office in the remainder of the year compared to Q2 growth?.

I mean, I don't think that we should ever be in a position again of predicting a quarter-by-quarter. Obviously, Q3 tends to be higher in local language, because it has the so-called blackout periods.

But it really, over time, feels like we're in a better place and actually quite a good place, but you really can't predict quarter-to-quarter, because that is just not a productive thing to do..

All right. Thank you very much..

Your next question will come from the line of Jim Goss from Barrington Research. Please go ahead..

Thanks. Got a couple.

One related to the AMC Stubs A-List subscription program, I was wondering, to the extent that a couple of views would be enough to more than offset that $20 price, how does that impact your revenue splits in those instances?.

With the studios, they're unaffected on that side of the equation. So, we're paid off an imputed ticket price. And with AMC, we have a formula where we're protected on the downside, Jim. So, it's only upside for us. And it is kind of a make-whole, so if it ends up being less, they'll write us a check for the difference..

Okay. That's good to know from your standpoint.

Another thing, with the promotional program, your brand campaign, are you expecting that that's going to have some uplift to PSAs in general in each of the markets, and do you have any initial objectives or longer-term objectives you think can play into that?.

Well, certainly the longer-term objective is to put butts in seats, firm our pricing proposition all around with studios and exhibitors and reinforce the IMAX difference for filmmakers and studios and everyone. It's primarily driven, though, by economics that we're going to make more money by doing this brand campaign.

I don't think you should expect the next movie, Mission, the day after we launch, to change because of the brand campaign.

But when you see it, which I hope you do, there are iconic aspects to it that are going to be reinforced through all aspects in the theater on the screen, on the advertising, and I think that takes a while, as a chain, to be reinforced, but when it is reinforced, I do expect that to make a difference on PSAs and on overall box office..

Okay. And one final thing; historically, it's been a little tougher for IMAX to participate in some of the seating changes that have taken place, just because of the IMAX geometry and the distance and the slope of the theater seating. But you've talked again today about trying to participate in that.

I'm just wondering what kind of solutions you are coming up with that might be compatible with the IMAX geometry..

Well. Jim, we've done a number of retrofits already, and they're mostly plush rockers. So, if you're not familiar with that, think of it like sort of a recliner that doesn't go all the way down and doesn't have a foot part to it. But at Lincoln Square, for example, and the large AMC Theatres, we've retrofit four of them already..

40..

The laser experience, which is an upgrade; the new branding campaign, and the reseating branding in the theaters, and you'll understand why we think the differentiation will increase..

Okay. Thanks very much. Appreciate it..

And we'll go ahead with our next question from Mike Hickey of The Benchmark Company. Please go ahead..

Thank you, guys. Thanks for taking the questions and congrats on our strong quarter. I guess, the first question that's on the slate, I guess, and this year we sort of know we missed the blockbusters; so I've been looking at next year, sort of the top 15 films in 2019 seems that there is maybe a bit of a mix shift towards family/kid movies.

I'm sort of curious if you think that's true and if that creates, maybe, a different quote comparable for you next year, compared to what we saw in 2018; and then a follow-up..

No.

I don't think it's difficult at all, and I think that when you look at, particularly that those movies are some of the biggest franchises in the world, for instance, like The Lion King, and you compare it to how Disney does it, versus seemingly – there are other obviously very much at the top of the game, I don't think that's an issue because of our flexibility.

We're going to play the biggest titles, so I know there's Toy Story, and there's Aladdin, and there's Lion King, and those are all movies – there's Frozen 2 and those are all movies that IMAX should be a part of because any billion-dollar franchise, whatever it does, we want to be a part of.

At the same time, mixed throughout that year are movies like Wonder Woman 2, and movies like Episode IX and plenty of obviously Marvel titles and we want to be a part of that too. So, our goal in the process, Rich talked about it often in the call, is blockbusters.

If it's a blockbuster that's a family title, or if it's a blockbuster that's a Fanboy title, we want to be a part of all of them, and we think there's plenty of room in our network for all kinds, as long as they're working for consumers..

Okay. Fair enough. Thank you for that.

Now, I guess the last question which is sort of three parts – and you can give quick answers if you want; – the – on the subscriber plan, thinking about the one that seems to stand out, which is the AMC Stubs A-List, clearly early days, but I was wondering if you have any visibility at this point on what you're seeing in terms of any incremental lift in attendance and sales from that program? And I'm curious if you think that a program like this, a subscriber model for moviegoers, can scale to something greater than or maybe equal to what you'd see in Europe, which I think is 20% of box.

My last question is, I guess, if so, if they can scale, when you look at the AMC plan, it looks like a big part of the value proposition – in fact, you can see a movie in IMAX and I guess to your example, you can see a movie with a first class ticket like you would on the plane, which I think is a good analogy.

If so, do you think that potentially increases your potential screen installations domestically, because I think despite AMC being your biggest partner, you still own 29% percent of their domestic footprint. A lot of questions, but I'd appreciate your views. Thank you..

Yes, they are and I appreciate you giving me the option of answering them briefly. How is it going? With the caveat it's very early, it's going well. I think we and AMC are both pleased with the uptake.

It's going well; early on, we don't have numbers yet, but better than they expected; and I haven't seen the result in the numbers yet because it's too small, but anecdotally, talking to AMC, they told me more people are going to IMAX theaters. So the two key parts are positive for us.

In terms of scalability of the European model, I do think it's scalable. In Europe, there have been things like reserved seating for years and advanced ticketing, which just came to the U.S.

So the European model wouldn't have worked until you had things like that; you know, the increase in online ticketing, and in fact, in Europe – I'm trying to remember, I think Cathay has been doing it for around a decade and I think Cineworld's been doing it for 15 years, and the number you cited, it varies from chain to chain, but I've heard a lot of them say it's around 20%.

You also have to look at the fact that Cineworld now owns Regal, and AMC owns ODEON, so there's joint ownership of those, so a lot of that history of how the programs work is institutionalized in North America. So I do think it's going to scale the same way it did in Europe.

And in terms of installations with AMC being affected, as you know, North America is the most penetrated market in the world; AMC recently doubled down on the IMAX business with their big laser upgrade deal.

So, I think if it works and there are zones available, AMC and others will take those zones and again, I think you've got to combine it all in the context with the increased differentiation where the consumer experience is going to be better in both sound and image, the branding is going to be better, and the in-theater experience is going to be better.

So, you put all of that together, I think the demand for IMAX theaters will still be there..

All right. Thanks, Rich. Good luck, guys..

And this concludes the Q&A section. I'd like to now turn the call over to Rich Gelfond for closing remarks..

So, as you can hear, there are a lot of exciting developments underway. We just had something that equaled our strongest quarter ever in box office, but we're not sitting in our hands, we're not running around celebrating.

We say, how do we use the momentum we have, and how do we do more and make sure we get better and better, and bring in more and more audiences. Studios from China to Hollywood are emphasizing big blockbuster content, and we're kind of the company that capitalizes on that on the consumer end.

IMAX with Laser further differentiates the IMAX experience, the brand campaign, innovative pricing programs, new markets, signing in installation activities such as Saudi Arabia, India, and Germany; and lastly, we expect our continued focus on containing costs to increase the earnings power of our business long-term.

So, we appreciate you all joining the call, and we look forward to being back with you at the end of next quarter..

And this concludes today's call. Thank you for your participation. You may now disconnect your lines and have a wonderful day, everyone..