IMAX's CEO Presents at Stifel, Nicolaus Technology, Internet & Media Conference (Transcript)

Feb.10.14 | About: IMAX Corporation (IMAX)

IMAX Corporation (NYSE:IMAX)

Stifel, Nicolaus Technology, Internet & Media Conference Call

February 10, 2014 05:45 PM ET

Executives

Greg Foster - EVP and Chief Executive Officer of IMAX Entertainment

Analysts

Ben Mogil - Stifel, Nicolaus & Co., Inc.

Question-and-Answer Session

Ben Mogil - Stifel, Nicolaus & Co., Inc.

My name is Ben Mogil. I cover the Media and Entertainment Structure at Stifel. My pleasure is to welcome Greg Foster. Greg has been with IMAX since 2001, has really seen the entire transformation of the company from what it used to be until what it is now and however that’s more [indiscernible] sort of more recent and modern stuff. So pretty interactive form when you just throw some questions and just chat with Greg in general so of course if anyone have questions please free to raise your hand, make it very interactive. So thank you for coming.

Greg Foster

Thanks for having me, everyone.

Ben Mogil - Stifel, Nicolaus & Co., Inc.

Absolutely, so here we are. So let’s talk about the emerging markets. You know a lot of Latin American exposure so right now that’s probably off of us (Ph). Maybe talk to us where you are in China? What you’re seeing in China? And maybe also give us a sense of so words and two different things. One would be, are you seeing, and I know it’s really in the year, any real changes in the consumer patterns and consumer spending from premium format, if you will? And then and again very early as well, are you seeing any changes at all in the development front [indiscernible] over China, Russia, any of the other Asian Markets again it has some currency or volatility issues related to your thoughts?

Greg Foster

Okay. So first of all on the China front, there is always an inherent level of volatility and yet it seems to be working as well right as it ever has. Since October, every movie that we’ve been in the paperwork to get into China because I think many of you know there is a quota has gotten in. We’ve never had that long of a strength (Ph) of having such traction in China. On top of that, the box office is thriving. We did remarkably well with The Monkey King, which is a local language film that was Chinese New Year movie. And in fact the director was unbelievably enthusiastic about the IMAX presentation. All of the Hollywood movies have gotten in.

Our installation base in the fourth quarter when a lot of our installed happened was quite successful in China. So, going to your point, are we seeing any kind of sort of reduction in what we expect, no. It’s working not onward exactly as we hoped it would. But that we think partially because our base in China is so significant that we’ve become the venue of choice for fan boys in particular to see movies. So we have a 140 theaters that are open in China, we have another 240 in backlog, that’s obviously a substantial amount of 380. We have announced that we think we’re going to, ultimately around, 400. I think there is a very strong likelihood that that will adjust over time. There looks like there is still some room.

We’re not seeing any change in the pace of the malls. Now that’s partially because the malls that we’re in business with are mostly with Wanda, also with CJ. Wanda is by-far the most high-end mall developed in China and those markets are, those locations are working really-really well. So again you never know but so far things are quite strong and we’re pleased with how things are going in China.

On the other virgin markets, some markets that I would look at that I think have terrific growth potential; one would Indonesia. Indonesia is obviously a very robust population becoming much more westernized. We are in partnership with a company called Cinema 21 that does a great job in Indonesia and our per screen averages in Indonesia have been quite noticeable in a positive way. We’re also seeing great growth in some of the other Southeast Asian markets like Malaysia, which is also being something that we’re looking at quite a lot. Our per screen averages in general in the international marketplace is increasing. In fact in 2013 it was the very first year that our international box office exceeded our domestic box office and that’s a trend that we see continuing over time.

The good news is we have a lot more growth opportunity internationally. Our domestic growth is with backlog in theaters open a little over 400 right now. And so we’re getting towards the end of the growth potential in North America unless we decide to change something in terms of our business approach. But with that said in the international markets, there is another 800 screen, 900 screens, so we’ve got a long way to go there. So that’s a long winded answer, I hope that was what you were looking for.

Ben Mogil - Stifel, Nicolaus & Co., Inc.

Great, let’s first talk with the domestic funds a little bit. so it’s interesting so we kind of like hear this morning and they were actually talking about the fact that they’ve got, for the first time through Rave they’ve got some exposure to IMAX going to be I think is more exposure for the backlog and they were really pleased what they’re seeing. So, maybe talk to us about a couple of things. When we look at the share of box office for your films in North America on opening weekend, is generally in the very-very low teens or so for big blockbusters it lowers because its nominator is so large and you will see as high as 50-60 for some other films. When you look at that data, from a going forward perspective, when you go back to filmmakers G (Ph) what the feedback you give them on why was ’12 and not ’14 or what it was ’14 and not ’12. And maybe even [indiscernible] that with comments I mean do you think that there is the ability, is the box office deeper in some of these what we almost call now C markets than what was originally thought even maybe even just a year ago?

Greg Foster

So I think that what you’ve just hit on is the key to our North American business. So first of all let me affectionately correct you. We averaged around 14% or 15% last year on indexing and in fact three movies were north of 20%, one of them which was the rerelease of Jurassic Park, our indexing got into the 30s, Pacific Rim and Gravity, Gravity just went over $100 million on Imax, were in the 20s. So our indexing first of all, I’ve never once had a conservation with a film maker about our indexing. That’s not what film makers are interested in IMAX for, they’re interested in IMAX because it puts their film’s best foot forward and it’s a little too inside baseball for them to talk about the percentage of the box office. I think they’re aware that again, we’re the venue of choice for a lot of their movies. Where I think that we’re really benefiting right now are with great regional exhibitors. I wouldn’t necessarily Carmike a regional exhibitor; they’re one of the largest exhibitors. But they do have a little bit more of a focus on sort of the Atlantic area. But whether it’s Carmike or whether it’s an amazing exhibitor in Wichita, Kansas by the name of Bill Warren who also has a great IMAX theatre in Moore, Oklahoma, there is a business for IMAX in C and D markets. The Moore, Oklahoma theatre that Bill Warren developed or redeveloped uses IMAX as an anchor, it’s become a regional hub and in its first 12 months, now we on average on a global per screen average do between a 1.1 million and 1.2 million a year on a per screen basis. The Moore, Oklahoma theatre did $3 million, now this is not Dallas, this isn’t Chicago, this isn’t Atlanta, this is Moore, Oklahoma and it did $3 million. So if you are the right exhibitor and you use IMAX as the anchor or the hub for regional moving going, there’s plenty of room for opportunity. We’ve also seen great growth and success in college towns. We have a very specific audience for most of our movies which are the fan boys, of course we are always trying to expand that, but when you look at Madison, Wisconsin, and Eugene, Oregon and Austin, Texas, you will see great traction in the IMAX market, and I think there are a lot of those that we can move into that we haven’t been into. I can tell you a dozen, big college kind of towns that I think we have some opportunity to grow in. So in the old days you would think of IMAX only for the upper East side or the upper West side or Los Angeles or the Metrion here in San Francisco, and I don’t think that’s the case anymore.

Ben Mogil - Stifel, Nicolaus & Co., Inc.

And when you, and when you sort of, look when you talk to exhibitors, are you getting the sense from them that they’re feeling more and more comfortable that what used to be a box office number for a zone that was previously kind of, at the cusp of, a threshold if you will, they now realize that that can actually grow that box office and that will actually be successful from that perspective.

Greg Foster

Yes, I mean exhibitors are starting to build again, exhibitors didn’t build for a long time, there was a lot of acquisition, they were buying companies, there’s been some definite traction in terms of the number of exhibitors. There was a lot of buying up. I think that you probably will have heard whether it was from Carmike or Cinemart that the DoJ is watching a lot of stuff and there’s only so much room left for companies to be able to acquire other companies, so there’s going to be a lot more building, and if you’re going to build a new theatre and you’re going to try an attract a new audience, having an IMAX screen in that complex is probably a way to do that and to kind of wink to your local market and say this is not just a regular theatre this is a special theatre. I think movie goers have recognized that IMAX is an end to end solution, they wouldn’t use [audio gap], those terms but what I mean by that is that we work very closely with filmmakers, I still believe that the secret sauce to IMAX is our relationship with filmmakers. Filmmakers design movies with IMAX in mind, we don’t get involved with movies two weeks before the movie comes out or two days before the movie comes out, we’re involved with some movies two to three years before they come out. Gravity is a great example, Gravity is a movie that we involved with three plus years before it came out, and Gravity was the movie that was produced by David Heyman, we did all of the Harry Potter movies with, directed by Alfonso Cuarón who directed Prisoner of Azkaban, one of the early Harry Potter movies. So these relationships that we develop with filmmakers which only continue to grow are how we’re able to add more DNA, more IMAX code if you will to their films, and that’s something that we really like doing. It helps differentiate us and by differentiating us that helps differentiating our partners in the marketplace and the studios like that too and so this all kind of whoops -- this all kind of circles back, that’s why our indexing is going up. Our indexing is going up because for those big movies, movie goers are recognizing that IMAX is the place to see them because they’re going to see something that they can’t see anywhere else.

Ben Mogil - Stifel, Nicolaus & Co., Inc.

And when you go abroad, so China clearly has indexing numbers looking exceptionally strong particularly when you think about from the perspective of how many screens those movies are actually playing on. When you look at the west of Europe or in Europe it’s really been, you know the UK’s been strong but other markets it’s been the overall economic malaise etc, here. When you look at what you’ve got going in the US, the ability to go much deeper into markets, college towns, things like that. Are you seeing European exhibitors begin to sort of think much more closely about that I can go deeper in this market than I usually thought maybe, either real examples are just general comments to given us.

Greg Foster

I think, when they are, I still think there are bunch of market that going deeper isn’t really the issue. We still need to nail the kind of first line. So for instance, we have two theaters in Italy, we’re expanding in Italy and that’s great. Two years ago we had none. One of the best moves we made was hiring into Andrew Cripps who is the President of our Europe, Middle East and Africa business and is old friend of mine, and Rich has known him forever and he is doing a great job and our expansion in EMEA is that really significant and it’s been particularly significant into new markets into Portugal back into Germany where we’re now in the best multiplex and all of Germany, the CineStar theater in [indiscernible] in Berlin or again Italy.

Our expansion in the Netherlands just been great, we have a huge per screen average, we got into business with Cineworld and Cineworld has been a fabulous partner in the U.K. they were just sold to another partner of ours Cinema City and so I think Europe is a market, is a region that is burgeoning. We’ve also got into recently into Morocco, into Kenya, into a bunch of places that IMAX 10 years ago wasn’t a viable option and now it is so again our per screen average in some of the markets that I’ve mentioned are pretty strong and so I would be less focused however on going into the CND tiers and still there is a lot more room in those big grossing markets that we still haven’t gotten into. The Nordic countries in Scandinavia, we’re underrepresented there and I know that’s a big part of Andrew’s focus over the course of that 12 to 18 months.

Ben Mogil - Stifel, Nicolaus & Co., Inc.

And in France just a little bit different because the local product there has a bigger share?

Greg Foster

It is, it has its own peculiarities, [indiscernible] you said that not me. And with that said, French movies aren’t by design what one would typically think of as an IMAX to, where as if you take a movie that we did really well with called Dhoom 3, a Bollywood titled, it’s a big action film, that’s an IMAX movie; Stalingrad, the Russian movie, big huge epic movie, Monkey King has an iconic action flavor to it. One of my favorite movies made in the last five years, The Impossible which was a French movie, that’s not an IMAX movie doesn’t mean I can’t wait see it but it’s not an IMAX movie. So, that’s a trickier market but our theaters that we have with passé (Ph) are doing very nicely in France. And that’s great it just mean that the local language films become a little bit more difficult.

Ben Mogil - Stifel, Nicolaus & Co., Inc.

And when you kind of look out to I mean, this year is a bit fewer new releases, still we will obviously put a big formal (Ph) schedule but general you’ve got no problem selling despite to the young what you clearly want. Where you kind of look out going forward, are you - do you have any kind of sense or any kind of view that the studios sort of looking at the 2013 experience where they have really cannibalized themselves, are going to permanently kind of go to a lower level but more staggered (Ph) approaching lines gate has been graded by using now margins of released data, do you get the sense of what’s going to try [indiscernible] again in Gravity October, you know brand new dates.

Greg Foster

Seasonality with the exception maybe of 3 months of the year is done. There is no seasonality. I don’t think at this moment and it’s for lots of different reasons the Super Bowl and Playoffs are one of them that someone is necessarily going to release a big, huge giant blockbuster money in January. There are bigger movies coming out in February but I would still say that they’re kind of B plus and A minus movies instead of homerun kind of movies and I think September is a little tricky. The new television shows come out, it’s another baseball season, football just started, kids go back to school but other than that I think seasonality is done. Look at a April, April this year you’ve got Captain America, you’ve got Transcendence; in most of the international markets you have The Amazing Spiderman.

April used to be a dead month, April was where you kind of the graveyard at movies that you didn’t really know when to release them and so you write them off and put them in April. Not anymore at all and then Gravity, when you look at what Gravity as a $750 million coming out on October that just changed the paradigm completely.

Greg Foster

Wizard of Oz couple of years made mark [indiscernible] a month that actually not right.

Ben Mogil - Stifel, Nicolaus & Co., Inc.

Maybe talk to us about India. So, India is been the other obviously huge box-office market where Russia growth has been not sloppy, right because it’s been tempered by lack of joint ventures right, so installations are…

Greg Foster

No. We have I think in the CIS countries including obviously Russia I think between open and backlog Terry you can correct me, but I think we were about 60. That’s a big market and our per screen averages in Russia are huge. So, Russia is slow and steady, it’s kind of on a very even keel, it’s a very, very healthy market for us.

Ben Mogil - Stifel, Nicolaus & Co., Inc.

And when you look at these dynamics, you’re seeing in the market. In North America, it’s very much, the premium large format like ETX and RPX, are certainly what the exhibitors want but they are really not cannibalizing your business in any kind of capacity. And when you talk to the exhibitors they will even be very blunt and say, it’s either overflow or it’s the movie that I am actually playing or it’s defensive because IMAX are in same zone, but they’ll all stay point blank, if IMAX was [indiscernible] to put in heartbeat. What about outside the U.S.? I mean are you seeing Western Europe is that -- are you seeing sort of any of that kind of movie, I know sort of Latin America but besides them anyone else trying much of that?

Greg Foster

People will always do it, but it goes back to what you said, I am glad that I don’t to say it just because you happen to be correct. We have to spend a lot less time worrying about what everyone else does and just do our jobs. We know where we sit in the zeitgeist where we sit in the food chain. Again we’re an end-to-end solution, we have movie makers who are designing their movies with IMAX in mind, they use our cameras, they use our sound. It’s an experience that you can’t get anywhere else, it stands for something, all you have to do is go look at the box office and the ticket price in every single location that has an IMAX theatre and you will see that IMAX is the highest price tickets. And by the way we don’t price our tickets, exhibitors do.

So I think what we focus on is what we can do to deliver an experience that you can’t get anywhere else and when you start spending time worrying too much about what other people are doing, you take your eye off the ball. So there will always be people who are aspiring to be like us and are attempting to -- whether it’s with acute acronym or whatever, trying to link themselves to us. But the key to our business besides our technology, I think happens to be our relationship with film makers and our relationships with the studios. And they put their blockbuster films in IMAX.

Studios know that if a movie is going to be a block buster, it needs to be an IMAX. Now that’s a little bit not the case with animated movies. Animated movies are a little bit more difficult for us to really distinguish them, and also the price of a ticket is really expensive for a family of five. But with that said I take my hat off to our good friends and partners at Warner Brothers this weekend for Lego. Who would have thought that that movie would have done $70 million, but they pulled it off and they now have a franchise, that was a big, big victory for them and I couldn’t be happier for them.

So I think there might be some opportunities going forward but we have to be very careful and discreet about how we cherry pick. We turn down a lot more movies than we say yes to, and we try very hard and we’re not always successful but we try very hard to make sure that the movies that we say yes to are movies that we can bring an added value to the experience. If not then what’s the point of us doing them?

Ben Mogil - Stifel, Nicolaus & Co., Inc.

And then so my point, so you have Dhoom 3, was that your real big blockbuster, Bollywood blockbuster?

Greg Foster

It was our first Indian movie.

Ben Mogil - Stifel, Nicolaus & Co., Inc.

That’s great numbers and plays actually well outside of India, Canada, U.S.

Greg Foster

Which was the key to it, it played in Indonesia, it played all over the Middle East, they didn’t need our help in India, they needed our held outside of India and that’s what we gave them more than anything else plus the event sizing nature of it that it was an IMAX. We loved working on that movie, love our partners’ at Yash Raj and Anthony Vogels who runs our international film development business has done a fantastic job of picking the right titles to launch the local language business within and he’s doing an excellent job.

Ben Mogil - Stifel, Nicolaus & Co., Inc.

Greg you or Andrew, maybe more Andrew; are you guys seeing now some of the Indian exhibitors -- are you getting more inbound calls? Are you getting some more activity saying this movie did really good business; there could be more seeing of the market sort of them?

Greg Foster

We are, but we already have two great partners in India and it doesn’t mean that we don’t want more, Don Savant runs our Indian business, he oversees it and he does an excellent job and he’s also the guys who runs our whole Asia-Pacific business and has been the architect of theatre growth for us in China, Don sort of our five tool player. But our partner Ajay Bijli at PVR and Kiran Reddy at Sathyam Cinemas are already great partners in India, I think that there are other great partners that we could have but those two guys were big on honoring those who honor us and on the theatre side they get first dibs. Not only dibs because we have to open it up for everyone else. But I think you’ll find that they’ll start -- there will be more theatres coming from them as well.

[Question Inaudible]

Greg Foster

So selfishly we love 4K, because it gives us an opportunity to put our best foot forward. Where 4K is difficult, is for studios who are delivering 4K and have to have visual effects rendered in 4K output which means it’s more time to do it and it’s more expensive on the details. When you are in 4K, you become the world’s largest magnifying glass, and anything that’s not rendered with a quality level is exposed. That’s cool for us because our projectors are able to show that and we are up if someone does it the right way of showing 4K. But I’ll give an example of where it can sometimes be difficult. There’s a movie, it doesn’t really matter what it is. But there’s a movie, we often test movies before we release them and before we get involved to make sure that it’s going to hold up. Because if the quality of the presentation doesn’t meet the standards of what IMAX is supposed deliver it’s not going to help anyone. So someone gave us a movie that was rendered in 2K and they upraised it or we upraised it to 4K to match our system. And there is no way we could do it. You saw absolutely everything that they didn’t want you to see, that you couldn’t see in 2K because the 2K washed it out. It wasn’t available. It didn’t take it up a notch. In 4K, you saw every shortcut possible and so we had to pass on the movie. So if the effects are rendered at 4K and actually delivered as quality of 4K, it’s awesome. But if it is not then it can be a problem, and it looks fake.

Ben Mogil - Stifel, Nicolaus & Co., Inc.

Maybe talk to us about what kind of; maybe let’s go back to China a little bit. I think you’ve mentioned in earlier meeting that since October every movie social and animated has been in the market. So the market is clearly, this new perspective opened up, those splits have gotten better, a number of films have gotten better that’s all been very balanced.

Greg Foster

And in fact I’ve read today that, and I don’t know if it’s true, so I have to put that cavy (Ph) on it, but they are contemplating increasing the quota even more from 34 which I thought was interesting.

Ben Mogil - Stifel, Nicolaus & Co., Inc.

It’s interesting, I talked to an exhibitor who has these amounts of experience there, and they actually were saying the same thing. They actually were of the view that over time and again no timeline to find, but over time they actually thought the quota were toeing going away. That eventually the market would be at the level where the domestic product would hold its own and if necessary for people like you are with either doing some domestic, it was kind of all the same. So the way you kind of go forward and look forward, what parts of the domestic market in China do you feel you aren’t getting great share of, or do you feel that all of the filmmakers that you, what are your kinds of film, are talking to you?

Greg Foster

Again, Anthony has done a great job and our team in China does a great job of staying in close touch with the filmmakers and then frankly so do I and so does Rich and the rest of the team, Don and everyone, and Jenda. I think we’re getting our fair share and then some of the big Chinese blockbusters. If there’s anything about China that can be difficult it’s when a movie comes out in China months after it’s come out in the US. That’s the one thing that can be a little bit tricky. A lot of the movies are seen on people's computers very quickly after they are released in the first market. And so when you release the movie and let’s say in November and it doesn’t come out until February, you’ve sort of missed the window a little bit. That would be the biggest issue that I think I would have. With that said part of that has to do with certain unofficial blackout periods and part of it has to do with Chinese New Year where there is always going to be big Chinese movies released in the end of January and early February. But I think if you take how the China market is working today versus how people were concerned about it two or three years ago, there’s still more room for improvement. But the level of cooperation, the level of communication, is pretty good. It’s not perfect, but it’s not perfect anywhere. So I think if you’re looking at the glasses half empty or half-full, I would pause that there is a lot to be happy about; more to be happy about than to complain about.

Ben Mogil - Stifel, Nicolaus & Co., Inc.

And then when you look at Latin America which is sort of the one big reason that your presence has been underrepresented, and there’s obviously some structural differences or issues from your contract number years ago, are you, I mean it’s sort of obviously in fact tied with the economic environment there, any kind of update you can give us there?

Greg Foster

Our business with Cineopolis in Mexico and in Brazil is on the way up. The Mexican movie business wasn’t as strong several years ago. It’s definitely picked up. Alejandro Ramírez and his group are very-very innovative exhibitors. We have a theatre with them in Brazil that’s completely kicking butt and we feel really good about that. We are up to I want to say, it’s eight or nine theatres in Brazil now and our per screen averages in Brazil are also on the way up. This summer they’re going to be soccer crazy or football crazy, so that may be a little bit tricky. And then soon they will be Olympic crazy. But in general blockbusters do well. Brazil is also very much of a family-oriented market, very much of an animated market. That’s again not our value mix. That can sometimes make things difficult, but a lot of the superhero movies has done exceptionally well in Brazil. And I think Latin America -- it’s exciting to have markets like India, like Brazil, like Indonesia; that still have a tremendous amount of potential. If I were going to put my eggs in one basket it may not be Brazil in terms of having it to be a China like market. But I think there is still a lot more growth potential. And as I see our theatres that we do have do as well as they are, I am again -- maybe I am, I took a happy pill today but I'm just a little more inherently optimistic.

Ben Mogil - Stifel, Nicolaus & Co., Inc.

Anybody else?

Greg Foster

Thank you everyone.

Ben Mogil - Stifel, Nicolaus & Co., Inc.

On behalf of all of us, thank you very much.

Greg Foster

Thanks Ben.

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