Good day, ladies and gentlemen, and welcome to the IMAX Corp Full Year 2020 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Brett Harriss. Please go ahead.

Thank you, and good afternoon, everyone, and thank you for joining us on today’s fourth quarter earnings conference call.

On the call today to review the financial results are Rich Gelfond, Chief Executive Officer; and Patrick McClymont, Chief Financial Officer; Megan Colligan, President of IMAX Entertainment; and Rob Lister, Chief Legal Officer, are also joining us today. 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 earnings press release and the slide presentation have been posted on the Investor Relations section of our website. At the conclusion of this call, our historical excel model will be posted on the website as well.

I’d 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 in 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 earnings, results and outcomes.

Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During today’s call, references may be made to certain non-GAAP financial measures.

Discussion of management’s use of these measures and the definition of these measures as well as reconciliations to non-GAAP financial measures, including adjusted net income, adjusted EPS and adjusted EBITDA as defined by our credit facility are contained in this morning’s press release. With that, let me turn the call over to Mr. Rich Gelfond.

Rich?.

Impossible and Dune. And once the virus is under control, we remain confident based on our experience in Asia that audiences are eager to get out of the home to return to the movies and to seek out premium experiences. IMAX remains in an excellent position to benefit from this pent-up demand, gain market share and return quickly to profitability.

Looking at our network, we also see signs of demand for the IMAX experience among our exhibition partners as we delivered significant new system signings and installations in 2020. For the full year, we signed agreements for 65 IMAX systems and installed 71 new IMAX systems globally, including 33 in the fourth quarter.

And our backlog remained remarkably stable, ending the year at 527 compared to 531 at the end of 2019.

Given pandemic-related theater closures and related financial pressure on operators, this is clear proof of our partners’ commitment to the IMAX experience and a positive indication that exhibitors see IMAX technology as a must have offering and a value driver for audiences. It was also a remarkable logistical feat.

Given the challenges of technical operations and travel in the middle of the pandemic that we were able to install this many systems. As of now, 1,077 or approximately 70% of our global network is open. With encouraging signs with the box office and throughout our network, IMAX continues to drive consistent financial improvement.

IMAX is a unique entertainment technology business, and our financial results reflect our superior differentiated business model. We’ve driven strong sequential improvement across virtually every key metric since we first felt the global impact of the pandemic in Q2.

That includes revenue, box office, EBITDA and free cash flow with IMAX achieving positive EBITDA and cash flow in Q4 for the first time since Q1 of 2020.

Notably, we achieved these results with only a portion of our network generating significant revenue without the major Hollywood releases that have historically driven our box office and many of our present partners under substantial financial pressure.

Despite these headwinds, both our technology network and technology sales and maintenance revenue improved sequentially, contributing to positive EBITDA and free cash flow. In short, both our audiences and our exhibition partners continued to demand IMAX.

We closed the year with a cash position of $317 million, up from $305 million at the end of the third quarter. In Q1 of this quarter, we sold our stake through IMAX China in Maoyan for $17 million, which was a 16% return, which will further strengthen our already solid liquidity position.

We’re also encouraged by the steps some of our biggest exhibition partners have taken to shore up their financial positions. Most notably, AMC, which completed a capital raise at the end of January to significantly mitigate its risks.

To conclude, we’re very encouraged by the signs that we’re seeing in the global marketplace, particularly at the Asian box office from our record-breaking Chinese New Year to the monster blockbuster performance of Japan’s Demon Slayer, we have seen proof positive that global audiences are craving blockbuster entertainment and a return time when the virus is under control and people feel safe audiences are returning to theaters and our passionate IMAX fans are the first among them.

As they do, IMAX is uniquely positioned to benefit as the only geographically diversified global platform for blockbuster entertainment. The IMAX experience has seen strong growing demand around the world, and we have a formidable pipeline of content ahead.

The table is set for IMAX to grow our momentum and affirm our standing as one of the world’s premier entertainment experiences. We look forward to building on the unique privileged position we’ve established through the entertainment ecosystem, driving new OpEx means for growth and creating value for our shareholders.

Thanks again for joining us today. And please continue to do everything you can to stay safe and healthy. With that, I’ll turn it over to Patrick..

Legend of Deification and My People My Homeland. Hollywood films Tenet and Wonder Woman also contributed to results. The performance of local language titles benefiting from our efforts to partner with filmmakers and studios outside of the U.S.

Moving to costs SG&A, excluding stock-based compensation of $19.9 million declined from the $28.8 million of expense recorded in the fourth quarter of 2019.

The SG&A benefited from the cost actions we took at the beginning of pandemic as well as a $1.9 million benefit from government subsidies associated with COVID-19 relief, $1.4 million of which was allocated to SG&A. $5.7 million of costs normally allocated to cost of goods sold remained in SG&A this quarter due to reduced business activity.

Adjusted EBITDA for the quarter was $10 million, down from $47 million in the previous year. We’re very pleased to report positive EBITDA in the operating constraints and limited content available on our network. Net loss attributable to common shareholders for the quarter was $21.2 million or a loss of $0.36 per share.

Our fourth quarter results reflect the unique accounting items I would like to mention. Our noncash charges include a $4.9 million write-down of our deferred tax assets, a $3 million acquisition for expected credit losses associated with our theater and international studio partners and a $2.9 million inventory write-down.

We also recorded a $4.1 million charge associated with the final judgment in the legal matter. As Rich mentioned, IMAX China increased its target dividend payout ratio to 50% of net income. This reflects our underlying confidence that the strong recovery in box office seen in China can be sustained well into the future.

As a reminder, IMAX Corporation owns 70% of IMAX China and will be a direct beneficiary of the increased dividend. To wrap up, as the pace of vaccination is increasing around the world, and we rapidly approach the full reopening of our economies and our lives, we firmly believe IMAX is well positioned to bounce back quickly.

Our experience in China and other markets give us confident that consumers will return to IMAX theaters post-pandemic. Our key financial metrics are all improving. Our balance sheet and asset-light business model gives us the flexibility to ramp up quickly and effectively.

And there is a highly constant slate of IMAX friendly titles waiting to be released. In short, IMAX remains well positioned to immediately benefit on the reopening theaters in 2021 and driving post-pandemic entertainment ecosystem. With that, I’ll turn the call back over to the operator for Q&A..

[Operator Instructions] We’ll take our first question from Eric Handler with MKM Partners. Please go ahead..

Thank you very much, and good afternoon. Rich, I wondered if you could just sort of give us a few parameters to think about for 2021. I mean, it still stand now, any idea what the cadence of installs may look like? Or at least how are things shaping up for the first quarter or maybe the first half of the year? Or whatever you can give us with that.

And then secondly, now that the fourth quarter in a positive cash flow situation, things look like they’re getting a lot better for the industry or it looks like we’re going to have a bunch of blockbusters this summer in the back half of this year.

As the industry opens, how are you thinking about using your free cash flow? Where could it be invested to maybe accelerate some of your business initiatives? How are you thinking about the reopening? And is there an opportunity for IMAX to expand its presence?.

Okay. I’m going to start with the second one, and then I’m going to pass it to Patrick to talk about installed cadence, Eric. So where are we going to use our free cash flow? I mean, I think the first part is we still have an outstanding revolver.

And I think we’ve been incredibly nimble in adapting getting through this situation but I think we’re not going to run out and take whatever cash we generate and spend a lot of money on a lot of new things. I think we’d like to just be opportunistic.

And I think where we’ll focus that is going to be on some new initiatives that we’ve been working on during the pandemic of kind of – we’ve been very busy during that period of time. And I’ll be a little bit vague because we’ll announce things over the next couple of months. But we’ve had some pretty good developments in IMAX Enhanced.

We’ve been working on a number of things. And I think there’ll be opportunities there that we’ll see come to fruition. We’ve been working on a direct-to-consumer strategy, which includes an app and some other things. So as you know, our boss model is historically a B2B model.

And by going direct-to-consumer, we feel we can do better marketing and increase the IMAX penetration on a global basis. I think we’ll look at other initiatives. We haven’t talked about yet which aren’t going to consume a lot of cash, but some cash that we’ve been very excited about that we’ve been working on during this period of time.

And we still have a lot of – as Patrick said, during his presentation, we still have over 500 theaters in backlog and many of those are joint ventures, I think we’ll continue to invest in our network and our growth. And I think we’ve had very positive returns on that.

So I’ll pass it to Patrick to add to that if he chooses, but also to talk about the installed cadence..

Nothing to add on that front. Install, the cadence will be, we think what it typically is. And even in 2020, that ended up being a similar cadence where it’s relatively modest activity in the first two quarters, ramps up in the third and peaks in the fourth quarter. That’s the nature of how our partners typically think about installing theaters.

And so that drives our seasonality, if you like. So far this year, we’ve had kind of a handful of theaters in the first quarter that installed. That’s typically what happens, where things need to get open in advance of the New Year holiday in China. And so we’ve had that this year, just like any other year.

And we’d expect to unfold in a similar pattern. But then question is, where do we end up? And that’s still hard to predict. We’re not going to get back to where we were in 2018, 2019 kind of year. But that does not appear to be in the cards.

And we think we should be above where we were in 2020, but it’s really hard to give any specifics on that because we’re still working with our partners..

Great. Thank you very much..

We’ll take our next question from Alexia Quadrani with JPMorgan. Please go ahead..

Thank you very much. Rich, we heard from several studio executives this week talk about their commitment to the theaters. But they also mentioned the windows will look different coming out of this crisis than it was previously. I’m wondering you’ve got such great perspective of the industry, having worked in it for so long.

I’m wondering what you think about the potential for a change in consumer behavior which sort of window, something like what Paramount’s talking about Universal’s deal, will consumers wait? And my second question is more on IMAX ability to potentially really continue to gain a notable market share just given the natural skew toward more premium experiences rather than just seeing content home.

And will that demand for premium experiences continue to hold? Is it just sort of a – we just finally got out of our house and won’t say to go back outside, did you get more sustainable demand?.

Yes. So I’m going to collapse both questions in a way. And if I don’t fully answer it, please follow-up, Alexia, which is, I think there’s no question in my mind that consumer behavior is not going to change in a material way. And we don’t need to take out a weekly board to figure that out.

And as we talked about mostly in our script, we’ve seen consumer behavior in countries that are open and safe. And if anything, they’re more likely to go to the movies. And there was a quote a little while ago from J.J. Abrams, we said it was going to be – there are 20s were partly because of the Spanish flu. And I really do believe that.

I think people have been home on their couches for too long already. And I think when they can go out, they’re really going to want to go out. And the people I know who have gotten vaccinated already, they’re out in traveling. I just think there’s going to be a lot of pent-up demand.

In terms of – so about consumer behavior, yes, they’re sitting at home and streaming a lot, but they’re not allowed to leave their houses. So it’s a fairly biased sample at this point. I mean people have kitchens in their houses but in a normal time, they go to restaurants. Right now, they can’t go to movie theaters.

So they consume a lot online, and that makes a lot of sense to me. But when they can go out, they will go out. In terms of the changes in windows, I think IMAX is actually going to benefit from that. And I think the reason is because more of the value proposition is going to go to the back end of the release.

So when windows were static at 90 days and electronic sell-through and television and this and that. I think IMAX was important, but where if you are a company that owns a streaming service as well as the studio, you want to figure out a way to create the biggest possible profit overall for that property.

And there’s been studies done over years that show people who see a movie in IMAX like it better. They rate it higher, the brand association as well as the experience make it more valuable.

So I think as windows get shorter, studios and talent are going to be more focused on how to create an event around their movies and how to make their movies stand out from the clutter and be really special. And we started to see some of that already.

So over the last couple of months since windows have moved around, a lot of talent, directors have been in touch with IMAX and sort of said, how do we get more IMAX into our movie? How do we do more trailers? How do we do more premiums? How do we get a release? So I think – and then the final point I would make, I think the certainty, even though it’s not completely certain, but sort of the general view now that windows for blockbusters is going to be around 30 to 45 days, the ones we do, I tend to think closer to 45 days, and we play them for only two weeks.

So I don’t think those windowing patterns are going to change people going to IMAX. But I think certainty around that is a good thing. I think the uncertainty of windows has been a cloud over the exhibition business for a long time. And I think the certainty coming out is going to be beneficial..

Thank you very much..

We’ll take our next question from Mike Hickey with Benchmark. Please go ahead..

Hey, Rich, Patrick, Brett, hopefully, you guys are good. Great quarter and nice to see the cash flow, that’s amazing development. Curious sort of your perspective, Rich, I guess on U.S. market, obviously, we’ve seen China and Japan and Australia, I guess, come back strong here. Are you seeing similar signs, I guess, in the U.S.

in terms of sort of green shoots, so to speak, is the market coming back? And I guess specifically, Tom and Jerry sort of shocked us all with the strength there in family, family movies, getting the kids out of the house and going back to the theaters. Typically, that’s not always been the best content for you guys.

But in this situation in time, do you think you have an opportunity to sell more family content at your screening? I have a quick follow-up..

Yes. I mean, it’s interesting. I think this concept of pent-up demand is real. I think that if you look at other territories that opened like China and Japan, it wasn’t a switch, it was a faucet. And I think you needed things to kind of prime the pump along the way, and Tom and Jerry is one of those movies.

And I think there’ll be a number of movies that come out. One thing people haven’t really talked about, but I do think is going to happen is I think as some movies move back because they’re global theatrical releases. I wouldn’t be surprised to see some movies come forward.

And those discussions are happening right now in Hollywood because I think the U.S. is going to be in kind of decent shape from a public perception point of view in May-ish, maybe even mid-April with all the vaccines and the age of moviegoers is more consistent with younger people.

But I think the issue for a lot of the studios and their delays has been because of conditions in other countries like in Europe, which are a little behind and a little bit slower. So I think not all the moves are going to be bad moves and not all are going to put it out – put the bigger opening off.

I think some of them are going to fit this time to pump thing, and there have been rumors about that. So I think kind of what you referred to as the Tom and Jerry phenomenon. I think we’re going to see some of that along the way. And I think we’re going to be a little bit pleasantly surprised as we move into the blockbuster season..

Cool. The last question, slate obviously, looks great, the U.S. follows China.

What’s the implication for, I guess, rental margins and free cash flow?.

Patrick?.

I didn’t follow that. Hey, Mike, it’s Patrick. I’m sorry I didn’t follow that.

Can you just repeat that question?.

Yes. U.S. sort of follows China here, Patrick.

What’s the implication for rental margins and free cash flow?.

I think the implications are obviously good for better margins and free cash flow if the U.S. follows China. Because what happened in China was IMAX in debt better than it did before, and we kind of were a key part of leading the coverage. So if that happens, obviously, it will be positive for us..

The China numbers will be out shortly. They’re reporting their year-end numbers, and you’ll see that one things opened up again, because of the nature of our business overall, this assets to licensing the asset-light nature of it and the fact that we did all the right things on the cost side, their business snapped back quite nicely.

Their structure will look similar to ours, they’re – statement structure, they have higher margins because they don’t have the same R&D and some of the infrastructure that we have. But at the same dynamic, this business has great operating leverage, and we’d expect it to snap back quickly as the box office really starts to flow..

Thanks, guys..

Thanks, Mike..

We’ll take our next question from Jim Goss with Barrington Research. Please go ahead..

Okay. Thank you. One follow-up, Rich, in terms of Alexia’s question about windows, and you argued persuasively that they shouldn’t affect you. But I am sort of wondering if there is some concern that the studios are going to focus so much on blockbusters.

And less so on some of the smaller films that may change the mix in – available to back office in general, and it may persuade some of the exhibitors to maybe dedicate more strength to some of the content that you would have on your screen and maybe be a more of a competitive threat in that way?.

Yes, I mean, Jim, if we have seen that, we certainly would have seen it in China. Because while there’s been local language films opening up without U.S. films, and there’s been less Chinese films than it would ordinarily be in China. So I actually should have made that as an affirmative point.

We’re doing this terrific indexing, even though there’s less films and there’s more concentration in the multiplexes. So we certainly haven’t seen that. The other thing I would say, and this really isn’t talked about very much yet.

But as the windows shorten, I think some of the streaming companies will come into the market particularly related to your question, with some of the niche movies and maybe shorter windows, more consistent with the Universal deal. And I know Apple has already made some noise about honoring theatrical movies.

So even though the shorter windows will cut the length of some of the runs, I wouldn’t be surprised to see content coming in from some of the streaming companies to make up for that..

Okay. Interesting point, you also mentioned earlier, there was a first Asian film shot only with IMAX cameras. And I’m wondering to the extent that, that process continues and you get more films, majority or all in IMAX cameras.

Is your participation in that process changed the nature of your involvement such that you are sort of one of the producers and you may be able to participate in downstream and have access to other revenues you may not have before..

Jim, we’ve looked at that over the years that at one point, we were even playing together, you may remember, a Chinese film fund where for films shot with our cameras, we could get more economics that’s something we might look at again.

But generally, the reasons we do it are we think we index better and we get higher box office, and that’s the primary way that we participated. It’s worked out pretty well. So recently, we had the 800, which I referred to.

We had Detective Chinatown 3, which was one of the biggest blockbuster on Chinese New Year, and we had another one called A Writer’s Odyssey, which is also done with our camera. So we continue that effort. I think the filmmakers in China understand it and they’re excited by it. And we’re also looking at it in other countries.

As well, and I mentioned Demon Slayer and Japan, but I really didn’t maybe spend enough time talking about Japan, 15 of the top 20 IMAX theaters in the world were in Japan. I mean our PSAs are really high. We’re just really doing well and our five theater – the five-picture deal with TOHO, and we’re excited about those movies.

So I think you’ll probably see more along the line with films use our cameras in territories where we’re successful..

Okay.

Finally, is there any update you might want to provide for IMAX Live and IMAX Enhanced in the DTS relationship in terms of timing and potential?.

I think things continue to go pretty well with IMAX Enhanced. We’ve made a bunch of positive steps along the way. We’ve seeded the market for maybe some more significant steps and we’re ready to talk about them. We’ll announce some.

And in terms of IMAX Live, it’s obviously been a little bit difficult to do live entertainment in the United States when the theaters have been closed. So that’s still there. We’ve been working on different projects, making progress, but I think we’ll have to see when things open up, we’re still finding the strategy promising.

But we’ve done mostly kind of back room work during this period of time..

All right, thanks so much..

Thanks, Jim..

We’ll take our next question from Steven Frankel with Colliers..

Good afternoon and thank you.

Rich, given the strength of the slate this year, would you expect the typical summer season to extend into August or maybe even late August as opposed to kind of peaking earlier in the summer as it has typically?.

That’s a really good question, Steve. I think it depends on where things move. So right now, August isn’t a very crowded month for leases. But I think if things move out of the April, May period and they put them in the August period, that potential was quite high.

And another reason I’d say, it’s high is because typically, one reason films aren’t scheduled in August is because people are either out traveling or they’re getting ready for school. And since both of those have been kind of disruptive during the pandemic, I would think there’ll be more people staying home than usual in August.

So I think if there are films released and then blockbuster, so we all don’t know where that goes, that’s entirely possible..

Okay. And then what kind of marketing message do you use? Kind of what do you do differently to make sure people come out to IMAX, given you’re going to have a two-week window, and that’s it, how do you make sure you maximize that opportunity and get beyond just the fan-boy..

Well, again, I think you said a two-week window, that’s not really the cadence for films that we play, it’s going to be, I believe, by and large, a much longer window than that and under the details of some of these on IMAX – sorry, yes, two weeks in IMAX.

Yes, I think we’ll probably – we’ve been doing that for a while, exercising that a little bit more and it’s a limited run. I think it’s going to happen organically, though. I think when people go out to the movies once the pandemic goes they’re going to want something that’s really differentiated from their 40 or 60-inch television.

And I think they’re also going to migrate not only in the movie space, but in other areas to brand and entertainment, which is something they trust for the non-branded. And I think we’ll just reinforce those messages.

And as I alluded to before, I think the studios and filmmakers and the other talent are going to double down on their marketing efforts around IMAX as the way to see the film kind of a similar way that Chris Nolan does when he kind of post and urges people to see it in IMAX.

I don’t know if you saw Jack Schneider, he’s just talking about its rerelease of Justice League and was all over the place, talking about how special it is and IMAX side expect because of the windowing changes that to be even a bigger part of it.

And I think we’ll push some of that out of our marketing channels, and some of that will happen organically..

Great, thank you..

Thank you..

[Operator Instructions] We’ll go next to Mike Ng with Goldman Sachs. Please go ahead..

Thank you very much for the question. I just have two.

First, I was just wondering if you could talk a little bit more about how you’re leading into the local language strategy? And whether or not this higher contribution from local language can continue post-pandemic after things get back to normal and Hollywood continues to resume exporting films again? And then second, I was just wondering if you could provide a little bit more color on the installations in the fourth quarter.

What markets are those in? And do you see any changes in the pace of network expansion post-pandemic, especially from domestic theaters? Thank you..

Okay. Sure. So local language, Michael is part of a trend that has been going on for years. So we made a strategic decision to increase local language content several years ago. And if you look at the results, specifically in places like China and Japan, any geography, you’d see that every year, year-over-year, we’re doing more local language content.

We accelerated that effort during the pandemic because I would say you know Hollywood films, so we doubled down on it. Obviously, it’s worked very well. And just to take out one example, the TOHO example with Demon Slayer in Japan, it became the biggest movie in the history of Japan and IMAX, our biggest move, we had $27 million.

So I think it left us feeling very good about doing it. And I think it left TOHO, feeling very good, and that’s why we have a five-picture deal now. So I think kind of having a track record and seeing it work is going to make it more viable.

Obviously, there are going to be less slots available because of the Hollywood films and the blockbusters, which we’ll spend some time doing. But I think the other big thing, Michael, is that the genres are diversifying in the local language film. So in China, they used to be much more limited categories.

But now there’s science fiction, comedy and drama, all kinds of things. And they’re discovering that certain genres like Sci-Fi with Wandering Earth did so well in IMAX. So I think that’s going to really encourage people to seek out IMAX.

And I think that the audiences are coming in bigger numbers as you saw are indexing below the languages better than it was. So I do think it’s a trend that’s going to continue. We’re just going to have to balance it in a more crowded slate with Hollywood releases. And I’ll ask Patrick to give you his views on installation..

Sure. Hey Michael, it’s primarily China and other places in Asia in the fourth quarter, and that makes sense, right. China opened up first. They got their arms around operating issues, and we’re back in business first. More broadly, real estate construction and development construction projects resumed activity for us.

So it just all makes sense that China would be the focus in the fourth quarter. And that’s, as I mentioned, even into the first quarter, getting things open and operational for the New Year. We had further activity that was also predominantly in China.

Some other Asia as well, same dynamics as it was open is that our partners were more likely to be back in the installation again..

Great. Thanks, Rich. Thanks, Patrick..

Thanks Michael..

At this time, we have no further questions in the queue. I would like to turn the conference back to Rich Gelfond for any additional or closing remarks..

Maverick. I certainly can’t wait to get back to the movies, and I think a lot of people can feel that way. So thank you for joining us, and I’m hoping when we have our next call, we have even more visibility into all of this. Thanks, operator. I think that concludes the call..

Thank you very much. Ladies and gentlemen, this does conclude today’s conference. We appreciate your participation. You may now disconnect..